10-K 1 arcb-20151231x10k.htm 10-K arcb_Current folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the fiscal year December 31, 2015.

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from            to            .

 

Commission file number 0-19969

 

ARCBEST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

71-0673405

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3801 Old Greenwood Road, Fort Smith, Arkansas

 

72903

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code  479-785-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Name of each exchange

Title of each class

 

on which registered

Common Stock, $0.01 Par Value

 

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

 

The aggregate market value of the Common Stock held by nonaffiliates of the registrant as of June 30, 2015, was $779,103,181.

 

The number of shares of Common Stock, $0.01 par value, outstanding as of February 22, 2016, was 25,784,589.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the registrant’s Annual Stockholders’ Meeting to be held April 26, 2016, are incorporated by reference in Part III of this Form 10-K.

 

 

 


 

ARCBEST CORPORATION

 

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

 

ITEM

 

PAGE

NUMBER

 

NUMBER

 

PART I 

 

 

Forward-Looking Statements

Item 1. 

Business

Item 1A. 

Risk Factors

15 

Item 1B. 

Unresolved Staff Comments

29 

Item 2. 

Properties

29 

Item 3. 

Legal Proceedings

30 

Item 4. 

Mine Safety Disclosures

30 

 

 

 

PART II 

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31 

Item 6. 

Selected Financial Data

33 

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34 

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

53 

Item 8. 

Financial Statements and Supplementary Data

64 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

107 

Item 9A. 

Controls and Procedures

107 

Item 9B. 

Other Information

110 

 

 

 

PART III 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

110 

Item 11. 

Executive Compensation

110 

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

110 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

110 

Item 14. 

Principal Accountant Fees and Services

110 

 

 

 

PART IV 

 

Item 15. 

Exhibits and Financial Statement Schedules

111 

 

 

 

SIGNATURES 

112 

 

 

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PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact, included or incorporated by reference in this Annual Report on Form 10-K, including, but not limited to, those under “Business” in Item 1, “Risk Factors” in Item 1A, “Legal Proceedings” in Item 3, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, are forward-looking statements. Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “intend,” “may,” “plan,” “predict,” “project,” “scheduled,” “should,” “would,” and similar expressions and the negatives of such terms are intended to identify forward-looking statements. These statements are based on management’s beliefs, assumptions, and expectations based on currently available information, are not guarantees of future performance, and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable as and when made, we cannot provide assurance that our expectations will prove to be correct. Actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements due to a number of factors, including, but not limited to:

·

a failure of our information systems, including disruptions or failures of services essential to our operations or upon which our information technology platforms rely, data breach, and/or cybersecurity incidents;

·

union and nonunion employee wages and benefits, including changes in required contributions to multiemployer plans;

·

competitive initiatives and pricing pressures;

·

governmental regulations;

·

environmental laws and regulations, including emissions-control regulations;

·

the cost, integration, and performance of any future acquisitions;

·

relationships with employees, including unions, and our ability to attract and retain employees and/or independent owner operators;

·

unfavorable terms of, or the inability to reach agreement on, future collective bargaining agreements or a workforce stoppage by our employees covered under ABF Freight’s collective bargaining agreement;

·

general economic conditions and related shifts in market demand that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources;

·

potential impairment of goodwill and intangible assets;

·

availability and cost of reliable third-party services;

·

litigation or claims asserted against us;

·

self-insurance claims and insurance premium costs;

·

availability of fuel, the effect of volatility in fuel prices and the associated changes in fuel surcharges on securing increases in base freight rates, and the inability to collect fuel surcharges;

·

increased prices for and decreased availability of new revenue equipment, decreases in value of used revenue equipment, and higher costs of equipment-related operating expenses such as maintenance and fuel and related taxes;

·

the loss of key employees or the inability to execute succession planning strategies;

·

the impact of our brands and corporate reputation;

·

the cost, timing, and performance of growth initiatives;

·

default on covenants of financing arrangements and the availability and terms of future financing arrangements;

·

timing and amount of capital expenditures,

·

seasonal fluctuations and adverse weather conditions;

·

regulatory, economic, and other risks arising from our international business; and

·

other financial, operational, and legal risks and uncertainties detailed from time to time in ArcBest Corporation’s Securities and Exchange Commission (“SEC”) public filings.

 

For additional information regarding known material factors that could cause our actual results to differ from those expressed in these forward-looking statements, please see “Risk Factors” in Item 1A.

 

All forward-looking statements included or incorporated by reference in this Annual Report on Form 10-K and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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ITEM 1.BUSINESS

 

ArcBest Corporation

 

ArcBest Corporation® (the “Company,” “we,” “us,” and “our”) is a logistics company with The Skill & The Will® to solve complex freight transportation and logistics challenges. The Company, formerly known as Arkansas Best Corporation, was incorporated in Delaware in 1966. On May 1, 2014, we changed our name to ArcBest Corporation and our common stock began trading on the NASDAQ Global Select Market under a new symbol, ARCB. In conjunction with our name change, we adopted a new unified logo system as we strengthen our identity as a holistic provider of transportation and logistics solutions for a wide variety of customers. The Skill and The Will embodies our vision to find a way to meet our customers’ transportation and logistics needs. By focusing on our values — creativity, integrity, collaboration, growth, excellence, and wellness — we work together to deliver solutions to our customers, support our employees, grow our business with integrity, and strive to exceed expectations. From Fortune 100 companies to small businesses, our customers trust and rely on ArcBest brands and companies for all their transportation and logistics needs. Our employees deliver knowledge, expertise and a can-do attitude with every shipment and supply chain solution, residential move, and vehicle repair.

 

ArcBest Corporation, the parent holding company, has five reportable operating segments. Our principal operations are conducted through our Freight Transportation (ABF Freight®) segment, which consists of ABF Freight System, Inc. and certain other subsidiaries. Our asset-light logistics segments, which accounted for approximately 29% of our 2015 total revenues before other revenues and intercompany eliminations, are: Premium Logistics (Panther), Transportation Management (ABF Logistics®), Emergency & Preventative Maintenance (FleetNet), and Household Goods Moving Services (ABF Moving®). As of December 2015, we had approximately 13,000 active employees of which approximately 65% were members of labor unions.

 

Our strategy is to be a balanced, highly profitable and financially sustainable enterprise, using creativity and cooperation to solve transportation and logistics challenges for customers worldwide who value quality and an exceptional experience. We work to build long-term shareholder value by:

·

Expanding our revenue opportunities. We seek to expand our revenue opportunities through deepening our existing customer relationships and securing new ones. We build relationships that last for decades and our customers assign a high degree of value for the high level of service and professionalism we provide. When customers talk about us, they say that we solve problems, we are easy to do business with, and we are good partners who understand them. This focus on meeting our customers’ needs has resulted in the development of many of the businesses we now operate.

·

Balancing our revenue and profit mix. We are differentiated from our competition in our ability to offer logistics solutions with a wide variety of fulfillment options which can include our own assets. As our asset-light logistics businesses continue to grow alongside ABF Freight, we are balancing the mix of our revenue and profits between our asset-based and asset-light businesses. This balance drives long-term financial sustainability by making our business less capital-intensive relative to its size, and by reducing volatility in our business performance through varying cycles, events, and/or environments.

·

Optimizing our cost structure. We are focused on profitable growth, which causes us to continually review our costs and investment decisions accordingly. Our technology infrastructure enables business processes, insight and analytics that allow us to optimize our cost structure, and we continue to invest in technology to transform our business. Management is also incentivized to drive long-term shareholder value.

 

We continually analyze where additional capital should be invested and where management resources should be focused to improve relationships with customers and meet their expanding needs. Our management is focused on increasing returns to our stockholders. In response to customers’ needs for expanded service offerings, we have strategically increased investment in our asset-light logistics businesses. The additional resources invested in growing the asset-light logistics businesses is part of management’s long-term strategy to ensure we are positioned to serve the changing marketplace through these businesses and our traditional less-than-truckload (“LTL”) operations by providing a comprehensive suite of transportation and logistics services. As part of such strategy, we have completed the following acquisitions and changes to our business model:

·

On June 15, 2012, we acquired Panther Expedited Services, Inc., one of North America’s largest providers of expedited freight transportation services with expanding service offerings in premium freight logistics and freight forwarding.

·

On May 31, 2013, we acquired a privately-owned business which is included in the ABF Moving segment.

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·

Effective July 1, 2013, we formed the ABF Logistics segment in a strategic alignment of the sales and operations functions of our logistics businesses.

·

On April 30, 2014, we acquired a privately-owned business which is reported within the FleetNet segment.

·

During 2014, we established our enterprise solutions group to offer more easily accessible transportation and logistics solutions for our customers through a single point of contact.

·

On January 2, 2015, ABF Logistics acquired Smart Lines Transportation Group, LLC (“Smart Lines”), a privately-owned truckload brokerage firm.

·

On December 1, 2015, ABF Logistics acquired Bear Transportation Services, L.P. (“Bear”), a privately-owned truckload brokerage firm.

 

Through ABF Freight, Panther, ABF Logistics, FleetNet, and ABF Moving, we offer end-to-end solutions and expertise for our customers’ unique transportation and logistics needs, including: domestic and global transportation of LTL, truckload or full-container load (“FCL”), and less-than container load (“LCL”) shipments; expedited ground and time-definite delivery solutions; freight forwarding services; freight brokerage; transportation and warehouse management services; roadside assistance and total maintenance services for medium- and heavy-duty vehicles; and household goods moving market services for consumers, corporations, and the military.

 

Freight Transportation (ABF Freight) Segment

 

ABF Freight Business Overview

The ABF Freight segment includes ABF Freight System, Inc., our largest subsidiary, and certain other subsidiaries, including ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc. ABF Freight’s revenues, which totaled $1.9 billion, $1.9 billion, and $1.8 billion for the year ended December 31, 2015, 2014, and 2013, respectively, accounted for approximately 71%, 73%, and 75% of our total revenues before other revenues and intercompany eliminations in the respective year. Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K contains additional segment financial information, including revenues, operating income, and total assets for the years ended December 31, 2015, 2014, and 2013.

 

ABF Freight has been in continuous service since 1923. ABF Freight System, Inc. is the successor to Arkansas Motor Freight, a business originally organized in 1935 which was the successor to a local transfer and storage carrier that was originally organized in 1923. ABF Freight expanded operations through several strategic acquisitions and organic growth and is now one of the largest LTL motor carriers in North America, providing direct service to more than 98% of U.S. cities having a population of 30,000 or more. ABF Freight provides interstate and intrastate direct service to more than 48,000 communities through 248 service centers in all 50 states, Canada, and Puerto Rico. ABF Freight also provides motor carrier freight transportation services to customers in Mexico through arrangements with trucking companies in that country.

 

ABF Freight offers transportation of general commodities through standard, time-critical, expedited, and guaranteed LTL services — both nationally and regionally. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value, commodities in bulk, and those requiring special equipment. ABF Freight’s shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline, and water carrier. General commodities transported by ABF Freight include, among other things, food, textiles, apparel, furniture, appliances, chemicals, nonbulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery, and miscellaneous manufactured products.

 

ABF Freight provides shipping services to its customers by transporting a wide variety of large and small shipments to geographically dispersed destinations. Typically, LTL shipments are picked up at customers’ places of business and consolidated at a local service terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various terminals can be reconsolidated for other distribution centers or, more typically, local terminals. After arriving at a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when one large shipment or a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling. The LTL transportation industry, which requires networks of local pickup and delivery service centers combined with larger distribution facilities, is significantly more infrastructure-intensive than truckload operations and, as such, has higher barriers to entry. Costs associated with an expansive LTL network, including investments in or costs associated with real

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estate and labor costs related to local pickup, delivery, and cross-docking of shipments, are to a large extent fixed in nature unless service levels are significantly changed.

 

ABF Freight offers regional service with its traditional long-haul model to facilitate its customers’ next-day and second-day delivery needs in most areas throughout the United States. Development and expansion of the regional network required added labor flexibility, strategically positioned freight exchange points, and increased door capacity at a number of key locations. Regional service offerings within the ABF Freight network have resulted in reduced transit times and allows for consistent and continuous LTL service. ABF Freight defines the regional market, which represented approximately 60% of its tonnage in 2015, as tonnage moving 1,000 miles or less.

 

During the year ended December 31, 2015, no single customer accounted for more than 4% of ABF Freight’s revenues, and the 10 largest customers, on a combined basis, accounted for approximately 12% of its revenues. In 2015, ABF Freight managed 5.1 million customer shipments weighing a total of 6.6 billion pounds for an average weight of 1,298 pounds per shipment. As of December 31, 2015, ABF Freight utilized approximately 4,200 tractors and 20,800 trailers in its linehaul and local pickup and delivery operations.

 

ABF Freight Employees

As of December 2015, ABF Freight had approximately 11,000 active employees. Employee compensation and related costs are the largest components of ABF Freight’s operating expenses. In 2015, such costs amounted to 61.2% of ABF Freight’s revenues. As of December 2015, approximately 77% of ABF Freight’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which extends through March 31, 2018. The ABF NMFA included a 7% wage rate reduction upon the November 3, 2013 implementation date, followed by wage rate increases of 2% on July 1 in each of the next three years, which began in 2014, and a 2.5% increase on July 1, 2017; a one-week reduction in annual compensated vacation effective for employee anniversary dates on or after April 1, 2013; the option to expand the use of purchased transportation; and increased flexibility in labor work rules. The ABF NMFA and the related supplemental agreements provide for continued contributions to various multiemployer health, welfare, and pension plans maintained for the benefit of ABF Freight employees who are members of the IBT. The estimated net effect of the November 3, 2013 wage rate reduction and the benefit rate increase which was applied retroactively to August 1, 2013 was an initial reduction of approximately 4% to the combined total contractual wage and benefit rate under the ABF NMFA. Following the initial reduction, the combined contractual wage and benefit contribution rate under the ABF NMFA is estimated to increase approximately 2.5% to 3.0% on a compounded annual basis throughout the contract period which extends through March 31, 2018.

 

Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multiemployer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in multiemployer pension plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multiemployer pension plan and the members of such employer’s controlled group are jointly and severally liable for their share of the plan’s unfunded vested benefits in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan (i.e., in the event of a complete or partial withdrawal from the multiemployer plans). The Multiemployer Pension Reform Act of 2014 (the “Reform Act”), which was included in the Consolidated and Further Continuing Appropriations Act of 2015 (the “CFCAA”) that was signed into law on December 16, 2014, includes new multiemployer pension provisions to address the funding of multiemployer pension plans in critical and declining status by reducing accrued benefits under those plans. Any actions taken by trustees of multiemployer pension plans under the Reform Act will not reduce benefit rates ABF Freight is obligated to pay under its current contract with the IBT; however, management believes the Reform Act is a constructive step in addressing the complex funding issues facing multiemployer pension plans and their contributing employers. See Note I to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more specific disclosures regarding the multiemployer pension plans to which ABF Freight contributes and the actions taken by one of these plans to seek approval for benefit reductions under the Reform Act.

 

ABF Freight operates in a highly competitive industry which consists predominantly of nonunion motor carriers. ABF Freight’s nonunion competitors have a lower fringe benefit cost structure and less stringent labor work rules, and certain carriers also have lower wage rates for their freight-handling and driving personnel. Wage and benefit concessions granted to certain union competitors also allow for a lower cost structure than that of ABF Freight. ABF Freight has continued to address with the IBT the effect of ABF Freight’s wage and benefit cost structure on its operating results. The combined effect of cost reductions under the ABF NMFA, lower cost increases throughout the contract period, and increased

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flexibility in labor work rules are important factors in bringing ABF Freight’s labor cost structure closer in line with that of its competitors; however, under its collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry. These rates include contributions to multiemployer plans, a portion of which are used to fund benefits for individuals who were never employed by ABF Freight. Information provided by a large multiemployer pension plan to which ABF Freight contributes indicates that approximately 50% of the plan’s benefit payments are made to retirees of companies that are no longer contributing employers.

 

Due to its national reputation, its working conditions, and its wages and benefits, ABF Freight has not historically experienced any significant long-term difficulty in attracting or retaining qualified employees, although short-term difficulties have been encountered in certain situations. Management believes that its employees are critical to ABF Freight’s focus on customer service and careful cargo handling. See “Reputation and Responsibility” within this ABF Freight Segment section for information regarding ABF Freight’s recognition for safety, claims prevention, and employee leadership.

 

Competition, Pricing, and Industry Factors

ABF Freight competes with nonunion and union LTL carriers, including YRC Freight and YRC Regional Transportation (reporting segments of YRC Worldwide Inc.), FedEx Freight, Inc., UPS Freight (a business unit of United Parcel Service, Inc.), Old Dominion Freight Line, Inc., Saia, Inc., Roadrunner Transportation Systems, Inc., and the LTL operations of XPO Logistics, Inc. ABF Freight actively competes for freight business with other national, regional, and local motor carriers and, to a lesser extent, with private carriage, domestic and international freight forwarders, railroads, and airlines. Competition is based primarily on price, service, and availability of flexible shipping options to customers. ABF Freight seeks to offer value through identifying specific customer needs, then providing operational flexibility and seamless access to its services and those of our other operating segments in order to respond with customized solutions. ABF Freight’s careful cargo handling and use of technology, both internally to manage its business processes and externally to provide shipment visibility to its customers, are examples of how ABF Freight adds value to its services.

 

Approximately 35% of ABF Freight’s business is subject to ABF Freight’s base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other 65% of ABF Freight’s business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. The majority of the business that is subject to negotiated pricing arrangements is associated with larger customer accounts with annually negotiated pricing arrangements, and the remaining business is priced on an individual shipment basis considering each shipment’s unique profile, value provided by ABF Freight to the customer, and current market conditions. ABF Freight also charges a fuel surcharge which is based on the index of national on-highway average diesel fuel prices published weekly by the U.S. Department of Energy. While the fuel surcharge is one of several components in ABF Freight’s overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer.

 

The level of tonnage managed by ABF Freight is directly affected by industrial production and manufacturing, distribution, residential and commercial construction, consumer spending, primarily in the North American economy, and capacity in the trucking industry. ABF Freight’s operating results are affected by economic cycles, customers’ business cycles, and changes in customers’ business practices. Freight shipments, operating costs, and earnings are also adversely affected by inclement weather conditions. In addition, seasonal fluctuations affect tonnage and shipment levels. The second and third calendar quarters of each year usually have the highest tonnage levels, while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, may influence quarterly freight tonnage levels.

 

The trucking industry faces rising costs, including costs of compliance with government regulations on safety, equipment design and maintenance, driver utilization, and fuel economy, and rising costs in certain non-industry specific areas, including health care and retirement benefits. The trucking industry is dependent upon the availability of adequate fuel supplies. ABF Freight has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage develops.

 

The U.S. Department of Transportation (“DOT”) hours-of-service rules regulating driving time for commercial truck drivers became effective in January 2004. The effective date of the current hours-of-service rules issued by the Federal Motor Carrier Safety Administration (“FMCSA”) of the DOT was February 27, 2012, with a July 1, 2013 compliance date for selected provisions. Implementation of the hours-of-service rules has had a slightly negative impact on ABF Freight’s fleet utilization. The CFCAA amended certain provisions of the hours-of-service rules; however, the changes did not have

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an impact on ABF Freight’s operations. Future modifications to the hours-of-service rules may impact ABF Freight’s operating practices and costs.

 

The FMCSA issued a final rule, which became effective in February 2016, regarding the requirements for interstate commercial trucks to install electronic logging devices (“ELDs”) to monitor compliance with hours-of-service regulations. Motor carriers will be required to be in compliance with the mandate by December 2017. ABF Freight is in the final stages of equipping its fleet with ELDs and is in the process of integrating existing reporting with the new ELD solution that will allow for the electronic capture of drivers’ hours of service, as well as improve administrative, dispatch, operational, and maintenance efficiencies.

 

Technology

Our advancements in technology are important to customer service and provide a competitive advantage. The majority of the applications of information technology ABF Freight uses have been developed internally and tailored specifically for customer or internal business processing needs.

 

ABF Freight makes information readily accessible to its customers through various electronic pricing, billing, and tracking services, including an application for mobile devices which allows customers to access information about their ABF Freight shipments and request shipment pickup. Online functions tailored to the services requested by ABF Freight customers include bill of lading generation, pickup planning, customer-specific price quotations, proactive tracking, customized e-mail notification, logistics reporting, dynamic rerouting, and extensible markup language (XML) connectivity. This technology allows customers to incorporate data from ABF Freight’s systems directly into their own Web site or backend information systems. As a result, ABF Freight’s customers can provide shipping information and support directly to their own customers.

 

Wireless technology enhances the speed and utility of the system by streamlining procedures across ABF Freight’s transportation network. City drivers, dockworkers, dispatchers, and others are connected to the system and to customers in real time via mobile devices. These devices allow for more efficient shipment pickups, paperless dock operations, and optimal load planning.

 

Insurance, Safety, and Security

Generally, claims exposure in the motor carrier industry consists of workers’ compensation, third-party casualty, and cargo loss and damage. ABF Freight is effectively self-insured for $1.0 million of each workers’ compensation loss, generally $1.0 million of each third-party casualty loss, and $1.0 million of each cargo loss. We maintain insurance that we believe is adequate to cover losses in excess of such self-insured amounts. However, we cannot provide assurance that our insurance coverage will provide adequate protection under all circumstances or against all potential losses. We have experienced situations where excess insurance carriers have become insolvent. We pay assessments and fees to state guaranty funds in states where we have workers’ compensation self-insurance authority. In some of these states, depending on the specific state’s rules, the guaranty funds may pay excess claims if the insurer cannot pay due to insolvency. However, there can be no certainty of the solvency of individual state guaranty funds.

 

We have been able to obtain what we believe to be adequate insurance coverage for 2016 and are not aware of any matters which would significantly impair our ability to obtain adequate insurance coverage at market rates for our operations in the foreseeable future. A material increase in the frequency or severity of accidents, cargo claims, or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on our cost of insurance and results of operations.

 

As evidenced by being a seven-time winner of both the American Trucking Associations’ President’s Trophy for Safety and the Excellence in Security Award and a six-time winner of the Excellence in Claims/Loss Prevention Award, ABF Freight believes that it has maintained one of the best safety records and one of the lowest cargo claims ratios in the LTL industry.

 

ABF Freight has been subject to cargo security and transportation regulations issued by the Transportation Security Administration (“TSA”) since 2001 and regulations issued by the U.S. Department of Homeland Security since 2002. ABF Freight is not able to accurately predict how past or future events will affect government regulations and the transportation industry. ABF Freight believes that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.

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Environmental and Other Government Regulations

We are subject to federal, state, and local environmental laws and regulations relating to, among other things: emissions control, transportation of hazardous materials, underground and aboveground storage tanks, stormwater pollution prevention, contingency planning for spills of petroleum products, and disposal of waste oil.

 

New tractor engine design requirements mandated by the Environmental Protection Agency (“EPA”) intended to reduce emissions became effective on January 1, 2007, and more restrictive EPA emission-control design requirements became effective for engines built on or after January 1, 2010. In August 2011, the EPA and the National Highway Traffic Safety Administration (the “NHTSA”) established a national program to reduce greenhouse gas (“GHG”) emissions and establish new fuel efficiency standards for commercial vehicles beginning in model year 2014 and extending through model year 2018. The new tractors ABF Freight placed in service in 2014 and 2015 are equipped with engines that meet such standards. In June 2015, the EPA and the NHTSA jointly proposed a national program that would establish the second phase of greenhouse gas emissions (“EPA/NHTSA Phase 2”) and impose new fuel efficiency standards for heavy-duty vehicles, such as those operated by ABF Freight, and also institute fuel efficiency improvement technology requirements for trailers beginning with model year 2018 and extending through model year 2027. A number of states have individually enacted, and California and certain other states may continue to enact, legislation relating to engine emissions, fuel economy, and/or fuel formulation, such as regulations enacted by the California Air Resources Board (“CARB”). At the present time, management believes that these regulations may not result in significant net additional overall costs should the technologies developed for tractors, as required in the EPA/NHTSA Phase 2 proposed rulemaking for later implementation dates, prove to be as cost-effective as forecasted by the EPA/NHTSA. However, although fuel consumption and emissions may be reduced under the new standards, emission-related regulatory actions have historically resulted in increased costs of revenue equipment, diesel fuel, and equipment maintenance, and future legislation, if enacted, could result in increases in these and other costs. We are unable to determine with any certainty the effects of any future climate change legislation beyond the currently enacted regulations, and there can be no assurance that more restrictive regulations than those previously described will not be enacted.

 

ABF Freight stores fuel for use in tractors and trucks in 62 underground tanks located in 18 states. Maintenance of such tanks is regulated at the federal and, in most cases, state levels. We believe ABF Freight is in substantial compliance with all such regulations. The underground storage tanks are required to have leak detection systems, and we are not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on our operating results.

 

Certain ABF Freight branch facilities operate with stormwater permits under the federal Clean Water Act (“CWA”). The stormwater permits require periodic monitoring and reporting of stormwater sampling results and establish maximum levels of certain contaminants that may be contained in such samples. ABF Freight is currently involved in litigation related to alleged CWA violations at a branch facility in New York, as disclosed in Note O to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. The site qualified for an exemption from the permitting requirements of the CWA  under a procedure known as “no exposure certification” (“NEC”); however,  the validity of the NEC filing is being contested in such suit. It is not possible to determine the likelihood of loss or the amount of any penalties which might be assessed against ABF Freight in this suit.  

 

We have received notices from the EPA and others that we have been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, or other federal or state environmental statutes, at several hazardous waste sites. After investigating our subsidiaries’ involvement in waste disposal or waste generation at such sites, we have either agreed to de minimis settlements or determined that our obligations, other than those specifically accrued with respect to such sites, would involve immaterial monetary liability, although there can be no assurance in this regard. It is anticipated that the resolution of our environmental matters could take place over several years. Our reserves for environmental cleanup costs are estimated based on management’s experience with similar environmental matters and on testing performed at certain sites.

 

Reputation and Responsibility

ABF Freight is consistently recognized for best-in-class performance in service and in electronic and market innovation. In 2015, ABF Freight was named to Inbound Logistics’ list of “Top 100 Trucking Companies.” For the third consecutive year and the fourth time overall, ABF Freight received the Quest for Quality Award from Logistics Management magazine. ABF Freight has been ranked in the top 25 on Selling Power magazine’s list of “Best Companies to Sell For” for 14 consecutive years. Marking the seventh year in a row to be honored by Training magazine, ABF Freight was listed twenty-third in the “Training Top 125” in February 2016. For the third consecutive year and the fifth time in the last six years, ABF Freight was named as the “National LTL Carrier of the Year” by the National Shippers Strategic Transportation

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Council, which recognizes transportation providers on a quantitative scale in the areas of customer service, operational excellence, pricing, business relationship, leadership, and technology.

 

ABF Freight is dedicated to safety and security in providing transportation and freight-handling services to its customers. As previously discussed in “Insurance, Safety, and Security” within this ABF Freight Segment section, ABF Freight is a seven-time winner of both the American Trucking Associations’ President’s Trophy for Safety and the Excellence in Security Award, and a six-time winner of the Excellence in Claims/Loss Prevention Award. In January 2015, three ABF Freight drivers were named by the American Trucking Associations as captains of the 2015-2016 “America’s Road Team,” continuing the tradition of ABF Freight’s representation in this select program based on the drivers’ exceptional safety records and their strong commitment to safety and professionalism.

 

ABF Freight is actively involved in efforts to promote a cleaner environment by reducing both fuel consumption and emissions. For many years, ABF Freight has voluntarily limited the maximum speed of its trucks, which reduces fuel consumption and emissions and contributes to ABF Freight’s excellent safety record. ABF Freight also utilizes engine idle management programming to automatically shut down engines of parked tractors. Fuel consumption and emissions have also been minimized through a strict equipment maintenance schedule. In 2015, ABF Freight began voluntarily installing aerodynamic aids on its fleet of over-the-road trailers to further enhance fuel economy and reduce emissions.  In 2006, ABF Freight was accepted in the EPA’s SmartWay Transport Partnership, a collaboration between the EPA and the freight transportation industry that helps freight shippers, carriers, and logistics companies reduce greenhouse gases and diesel emissions. In recognition of ABF Freight’s industry leadership in freight supply chain environmental performance and energy efficiency, the EPA’s SmartWay Transport Partnership awarded ABF Freight a SmartWay Excellence Award in 2014. For the past six years, ABF Freight was recognized in Inbound Logistics’ annual list of supply chain partners committed to sustainability. Furthermore, in association with the American Trucking Associations’ Sustainability Task Force, ABF Freight has participated in other opportunities to address environmental issues.

 

Asset-Light Logistics Segments 

 

As part of management’s long-term strategy to ensure we are positioned to serve our customers within the changing marketplace by providing a comprehensive suite of transportation and logistics services, we continued to strategically invest resources to grow our asset-light logistics segments during 2015. Through unique methods and processes, including technology solutions, these businesses provide various logistics and maintenance services without significant investment in revenue equipment or real estate. Competition is based primarily on price, service, and the ability to provide high-quality logistics solutions to customers. For the year ended December 31, 2015, 2014, and 2013, the combined revenues of our asset-light logistics segments (formerly referred to as “non-asset-based” segments) totaled $798.1 million, $722.5 million, and $571.8 million, respectively, accounting for approximately 29%, 27%, and 25% of our total revenues before other revenues and intercompany eliminations in the respective periods. Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K contains additional segment financial information, including revenues, operating income, and total assets for the years ended December 31, 2015, 2014, and 2013.

 

Premium Logistics (Panther)

The Panther segment includes the operating results of Panther Premium Logistics, Inc., formerly Panther Expedited Services, Inc. which was founded in 1992 and acquired by the Company on June 15, 2012. Panther is a leading provider of premium logistics services including time-sensitive, mission-critical, and white-glove delivery. Panther provides expedited freight transportation services to commercial and government customers and offers premium logistics services that involve the rapid deployment of highly specialized equipment to meet extremely specific linehaul requirements, such as temperature control, hazardous materials, geofencing (routing a shipment across a mandatory, defined route with satellite monitoring and automated alerts concerning any deviation from the route), specialized government cargo, security services, and life sciences. Through its premium logistics and global freight forwarding businesses, Panther solves the toughest shipping and logistics challenges that customers face through a global network of owner operators and partners specializing in ground, air, and ocean shipping. Additional value is created for Panther customers through seamless access to both ABF Freight and ABF Logistics services which facilitate delivery of more holistic transportation and logistics solutions. As of December 2015, Panther had approximately 500 active employees to support its operations.

 

For the year ended December 31, 2015, 2014, and 2013, Panther revenues, which totaled $300.4 million, $316.7 million, and $246.8 million, respectively, accounted for approximately 11%, 12%, and 11%, respectively, of our total revenues before other revenues and intercompany eliminations.

 

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Panther’s expedited freight transportation customers communicate their freight needs, typically on a shipment-by-shipment basis, by means of telephone, email, internet, or Electronic Data Interchange (“EDI”). The information about each shipment is entered into a proprietary operating system which facilitates selection of a contracted carrier or carriers based on the carrier’s service capability, equipment availability, freight rates, and other relevant factors. Once the contracted carrier is selected, the cost for the transportation has been agreed upon, and the contract carrier has committed to provide the transportation, Panther is in contact with the contract carrier through numerous means of communication (including EDI, its proprietary Web site, email, fax, telephone, and mobile applications) and utilizes satellite tracking and communication units on the vehicles to continually update the position of equipment to meet customers’ requirements as well as to track the status of the shipment from origin to delivery. The satellite tracking and communication system automatically updates Panther’s fully-integrated internal software and provides customers with real-time electronic updates. 

 

Substantially all of the network capacity for Panther’s operations is provided by third-party contract carriers, including owner operators, ground line-haul providers, cartage agents, air freight carriers, ocean shipping lines, and other transportation asset providers, which are selected based on their ability to serve Panther’s customers effectively with respect to price, technology capabilities, geographic coverage, and quality of service. Third-party owned vehicles are driven by independent contract drivers and by drivers engaged directly by independent owners of multiple pieces of equipment, commonly referred to as fleet owners. Panther owns a fleet of trailers, the communication devices used by its owner operators, and certain highly specialized equipment, primarily temperature-controlled trailers, to meet the service requirements of certain customers.

 

Panther faces market competition from service providers that offer one or more similar premium freight logistics services. Panther’s highly fragmented competitive landscape includes both non-asset-based and asset-based logistics companies, including freight forwarders that dispatch shipments via asset-based carriers; smaller expedited carriers; integrated transportation companies that operate their own aircraft and trucks; cargo sales agents and brokers; internal shipping departments at companies that have substantial transportation requirements; associations of shippers organized to consolidate their members’ shipments to obtain lower freight rates; and smaller niche service providers that provide services in a specific geographic market, industry, or service area. Panther and FedEx Custom Critical are North America’s largest expedited freight transportation service providers. In this market, Panther also competes directly with several small regional and specialized carriers that have close relationships with certain of their customers. Panther has many significantly larger competitors in the truckload market. The premium freight logistics market is the largest market in which Panther competes, and Panther is a relatively smaller and newer competitor in comparison to companies that have operations worldwide and those that have been in business for several decades.

 

Quality of service, technological capabilities, and industry expertise are critical differentiators among the competition. In particular, companies with advanced technological systems that offer optimized shipping solutions, real-time visibility of shipments, verification of chain of custody procedures, and advanced security have significant operational advantages and create enhanced customer value. Panther’s performance in each of these areas of competitive distinction has enabled the segment to secure business and help meet growth expectations within the asset-light logistics portion of our business. In recognition of its commitment to quality, Panther was awarded the “Quest for Quality Award” in the expedited motor carrier category by Logistics Magazine in 2013. Panther was recognized by Inbound Logistics’ as one of  the “Top 100 Trucking Companies” in 2014 and 2015.

 

Panther is subject to various laws, rules, and regulations and is required to obtain and maintain various licenses and permits, some of which are difficult to obtain. Panther’s network of third-party contract carriers must comply with the safety and fitness regulations of the DOT, including those relating to drug and alcohol testing and hours of service. Implementation of the current hours-of-service rules has had a slightly negative impact on Panther’s fleet utilization, and future modifications to these rules and other regulations impacting the transportation industry, which are more fully described in “Competition, Pricing, and Industry Factors” of the ABF Freight Segment section of Business, may impact Panther’s operating practices and costs.

 

Panther’s operations are influenced by seasonal fluctuations that impact customers’ supply chains and the resulting demand for expedited services. Expedited shipments may decline during winter months because of post-holiday slowdowns but can be subject to short-term increases, depending on the impact of weather disruptions to customers’ supply chains. Plant shutdowns during summer months may affect shipments for automotive and manufacturing customers, and major weather events can result in higher demand for expedited services.

 

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Transportation Management (ABF Logistics)

The ABF Logistics segment includes the results of operations of our businesses which provide freight brokerage and intermodal transportation services, worldwide ocean shipping solutions, and transportation and warehouse management services. Our investments in the strategic development of our asset-light logistics operating segments include ABF Logistics’ acquisitions of the privately-owned truckload brokerage firms Smart Lines and Bear on January 2, 2015 and December 1, 2015, respectively. As of December 2015, ABF Logistics had approximately 400 active employees to support its operations. During the year ended December 31, 2015, the segment’s 10 largest customers, on a combined basis, accounted for approximately 14% of its revenues.

 

For the year ended December 31, 2015, 2014, and 2013, ABF Logistics revenues, which totaled $203.5 million, $152.6 million, and $105.2 million, respectively, accounted for approximately 7%, 6%, and 5%, respectively, of our total revenues before other revenues and intercompany eliminations.

 

ABF Logistics provides third-party transportation brokerage and management services throughout North America by sourcing a variety of capacity solutions, including dry van over the road and intermodal, flatbed, temperature-controlled, and specialized equipment, coupled with strong technology and carrier- and customer-based Web tools. ABF Logistics also provides LCL and FCL service through its ocean transport offering to approximately 90% of the total ocean international market to and from the United States. Furthermore, the segment provides scalable transportation and warehouse management services that can be customized to efficiently manage customers’ supply chain needs.

 

ABF Logistics does not own any revenue equipment, ocean vessels, or warehouses; instead, it relies on a network of subcontracted third-party transportation and service providers. The segment’s operating success depends on the ability to find suitable transportation and service providers at the right time, place, and price to provide freight transportation and management services for customers. ABF Logistics seeks to offer value through identifying specific challenges of customers’ supply chain needs and providing customized solutions utilizing technology, both internally to manage its business processes and externally to provide shipment and inventory visibility to its customers. Additional value is created for ABF Logistics customers through seamless access to both ABF Freight and Panther services which facilitate delivery of more holistic transportation and logistics solutions.

 

ABF Logistics operates in a very competitive market that includes approximately 13,000 active brokerage authorities, thousands of foreign and U.S.-based non-vessel-operating common carriers, freight forwarders, and a wide variety of solution providers, including large transportation integrators as well as regional warehouse and transportation management firms. ABF Logistics competes on service, product and supplier performance, and price. ABF Logistics was recognized for the first time on Transport Topics’ list of “2015 Top Brokerage Firms.”

 

The industries and markets served by the segment are impacted by seasonal fluctuations which affect tonnage and shipment levels and, consequently, revenues and operating results of the segment. Freight shipments and operating costs of the ABF Logistics segment can be adversely affected by inclement weather conditions. The second and third calendar quarters of each year usually have the highest business levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, may influence quarterly business levels. However, seasonal fluctuations are less apparent in the operating results of ABF Logistics than in the industry as a whole because of business growth in the segment.

 

Emergency & Preventative Maintenance (FleetNet)

The FleetNet segment includes the results of operations of FleetNet America, Inc. (“FleetNet”), our subsidiary that provides roadside assistance and maintenance management services for commercial vehicles to customers in the United States and Canada through a network of third-party service providers. FleetNet began in 1953 as the internal breakdown department for Carolina Freight Carriers Corp. In 1993, the department was incorporated as Carolina Breakdown Service, Inc. to allow the opportunity for other trucking companies to take advantage of the established nationwide service. In 1995, we purchased WorldWay Corporation, which operated various subsidiaries including Carolina Freight Carriers Corp. and Carolina Breakdown Service, Inc. The name of Carolina Breakdown Service, Inc. was changed to FleetNet America, Inc. in 1997. FleetNet’s operations were expanded with the acquisition of a privately-owned business on April 30, 2014. FleetNet had approximately 350 active employees as of December 2015.

 

FleetNet strategically competes in the commercial vehicle maintenance and repair industry in two major sectors: emergency roadside and preventive maintenance. FleetNet competes directly against other third-party service providers, automotive fleet managers, leasing companies, and companies handling repairs in-house via individual service providers.

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While no one company encompasses all of FleetNet’s service offerings, competition is based primarily on providing maintenance solutions services. In partnership with best-in-class third-party vendors, FleetNet offers flexible, customized solutions and utilizes technology to provide valuable information and data to minimize fleet downtime, reduce maintenance events, and lower total maintenance costs for its customers.

 

Emergency roadside service events of the FleetNet segment are favorably impacted by severe weather conditions that affect commercial vehicle operations, and the segment’s results of operations will be influenced by seasonal variations in service event volume.

 

Household Goods Moving Services (ABF Moving)

ABF Moving includes the results of operations of our businesses which provide third-party transportation, warehousing, and delivery services to the consumer, corporate, and military household goods moving markets. This segment includes the operations of Albert Companies, Inc., of which we acquired a 75% ownership in 2009 and the remaining 25% in 2011, and Moving Solutions, Inc., which was established internally to provide sales, marketing, technology, and customer service to facilitate our household goods moving businesses. In 2013, we acquired a privately-owned moving business to enhance the services offered by the ABF Moving segment. ABF Moving generates a significant portion of its revenues from military relocation services under government contracts. A substantial portion of the freight transportation related to consumer self-move services is handled by ABF Freight, which directly invoices customers for such services. Certain sales, marketing, technology, and customer service costs incurred by ABF Moving in support of consumer self-move services provided by ABF Freight are allocated to the ABF Freight segment at cost. ABF Moving had approximately 250 active employees as of December 2015.

 

ABF Moving offers flexibility and convenience to the way people move through targeted service offerings for the “do it yourself consumer, corporate account employee relocations, and government employee relocations. ABF Moving offers these targeted services at competitive prices that reflect the additional value customers find in the segment’s convenient, reliable service offerings. Industry leading technology, customer-friendly interfaces, and supply chain solutions are combined to provide a wide range of options customized to meet unique customer needs. ABF Moving competes with truck rental, self-move, and van line service providers, and a number of emerging self-move competitors who offer moving and storage container service.

 

Albert Companies, Inc. was named one of the “Best Companies to Work for in Texas” in 2015. Albert Moving and Storage, a subsidiary within the ABF Moving segment, was honored as a 2015 Torch Award for Ethics recipient, as selected by the Better Business Bureau of North Central Texas in the large company category based on standards of ethics, customer and supplier relationships, and overall business conduct.

 

Operating results for ABF Moving are impacted by the state of the national economy, including housing, unemployment, and U.S. mobility, as well as decisions made by the U.S. military which affect personnel moves. Operations of the segment are also impacted by seasonal fluctuations, generally resulting in higher business levels in the second and third quarters as the demand for moving services are typically higher in the summer months.

 

Corporate Reputation and Responsibility

 

The value of the ABF and Panther brands is critical to our success. As previously discussed in “Reputation and Responsibility” within the “Freight Transportation (ABF Freight) Segment” section, ABF Freight is recognized as an industry leader for its commitment to quality, customer service, safety, and technology. Independent research has consistently shown that ABF Freight is regarded as a premium service provider, and that the ABF brand stands for excellence in the areas of customer service, reliability, strategic business partnership, and tactical problem solving. Our reputation is dependent on the image of the ABF brand as it applies to both ABF Freight and ABF Logistics. The Panther brand is also associated with premium service that surpasses customer expectations.

 

Through our subsidiaries, we hold trademark registrations and applications for trademark registration in the United States and in international locations for numerous service marks, including ArcBest Corporation, ABF, and Panther, among many others. We believe these marks are of significant value to our business and play an important role in enhancing brand recognition and executing our marketing strategy.

 

We have a corporate culture focused on quality service and responsibility. Our employees are committed to the communities in which they live and work. We make financial contributions to a number of charitable organizations, many

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of which are supported by our employees. These employees volunteer their time and expertise and many serve as officers or board members of various charitable organizations. In our hometown of Fort Smith, Arkansas, we have been a long-time supporter of the United Way of Fort Smith Area and its 34 partner organizations. In 2015, with employee support, we again earned the United Way’s coveted Pacesetter award by setting the standard for leadership and community support. As a past winner of the Outstanding Philanthropic Corporation Award, we have been recognized by the Arkansas Community Foundation for the service that our employees provide to exemplify the spirit of good citizenship, concern for the community, and support of worthy philanthropic endeavors.

 

Financial Information About Geographic Areas

 

Classifications of operations or revenues by geographic location beyond the descriptions previously provided are impractical and, therefore, are not provided. Our foreign operations are not significant.

 

Available Information

 

We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, proxy and information statements, and other information electronically with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Office of FOIA/PA Operations at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. Also, all reports and financial information filed with, or furnished to, the SEC can be obtained, free of charge, through our Web site located at arcb.com or through the SEC Web site located at sec.gov as soon as reasonably practical after such material is electronically filed with, or furnished to, the SEC. The information contained on our Web site does not constitute part of this Annual Report on Form 10-K nor shall it be deemed incorporated by reference into this Annual Report on Form 10-K.

 

 

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ITEM 1A.RISK FACTORS

 

The nature of the business activities we conduct subjects us to certain hazards and risks. This Risk Factors section discusses some of the material risks relating to our business activities, including business risks affecting the transportation industry in general as well as risks specific to our company that are largely out of our control. Other risks are described in “Item 1. Business – Freight Transportation (ABF Freight) Segment – Competition, Pricing, and Industry Factors” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” These risks are not the only risks we face. We may also be negatively impacted by a sustained interruption in our systems or operations, including, but not limited to, infrastructure damage, the loss of a key location such as a distribution center, or a significant disruption to the electric grid, or by a significant decline in demand for our services, each of which may arise from adverse weather conditions or natural calamities; illegal acts, including terrorist attacks; and/or other market disruptions. Our business could also be affected by additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. If any of these risks or circumstances actually occurs, it could materially harm our business, financial condition, or results of operations and impair our ability to implement business plans or complete development activities as scheduled. In that case, the market price of our common stock could decline.

 

We are dependent on our information technology systems, and a systems failure, data breach, or other cybersecurity incident could have a material adverse effect on our business, results of operations, and financial condition.

 

We depend on the proper functioning and availability of our information technology systems in operating our business. Our information technology systems are critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services as well as producing accurate and timely financial statements and analyzing information to help us manage our business efficiently and effectively. Cybersecurity attacks and cyber incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these systems or that result in confidential data being compromised could have a significant impact on our operations. We utilize certain software applications provided by third parties, or provide underlying data which is utilized by third parties to provide certain outsourced administrative functions, either of which may increase the risk of a cybersecurity incident. A significant cyber incident, including denial of service, system failure, security breach, intentional or inadvertent acts by employees, disruption by malware, or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, cause errors or delays in financial reporting, expose us to a risk of loss or litigation, and/or cause us to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our business, results of operations, and financial condition.

 

Certain of our information technology needs are provided by third parties, and we have limited control over the operation, quality, or maintenance of services provided by our vendors or whether they will continue to provide services that are essential to our business. The efficient and uninterrupted operation of our information technology systems depends upon the Internet, global communications providers, satellite-based communications systems, the electric grid, electric utility providers, and telecommunications providers; and our information technology systems are vulnerable to interruption by adverse weather conditions or natural calamities, power loss, telecommunications failures, terrorist attacks, Internet failures, computer viruses, and other events beyond our control. Disruptions or failures in the services upon which our information technology platforms rely, or in other services provided to us by outside service providers upon which we rely to operate our business and report financial results, may adversely affect our operations and the services we provide, which could increase our costs or result in a loss of customers that could have a material adverse effect on our results of operations and financial condition. Additionally, we license a variety of software that supports our operations, and thus these operations depend on our ability to maintain these licenses. We have no guarantees that we will be able to continue these licensing arrangements with the current licensors, or that we can replace the functions provided by these licenses, on commercially reasonable terms or at all.

 

We could be obligated to make additional significant contributions to multiemployer pension plans.

 

ABF Freight contributes to multiemployer pension and health and welfare plans to provide benefits for its contractual employees. ABF Freight’s contributions generally are based on the time worked by its contractual employees in accordance with its collective bargaining agreement with the IBT and other related supplemental agreements.

 

The multiemployer plans to which ABF Freight contributes, which have been established pursuant to the Taft-Hartley Act, are jointly-trusteed (half of the trustees of each plan are selected by the participating employers, the other half by the IBT)

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and cover collectively-bargained employees of multiple unrelated employers. Due to the inherent nature of multiemployer pension plans, there are risks associated with participation in these plans that differ from single-employer plans. Assets received by the plans are not segregated by employer, and contributions made by one employer can be and are used to provide benefits to current and former employees of other employers. If a participating employer in a multiemployer pension plan no longer contributes to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If a participating employer in a multiemployer pension plan completely withdraws from the plan, it owes to the plan its proportionate share of the plan’s unfunded vested benefits, referred to as a withdrawal liability. A complete withdrawal generally occurs when the employer permanently ceases to have an obligation to contribute to the plan. A withdrawal liability is also owed in the event the employer withdraws from a plan in connection with a mass withdrawal, which generally occurs when all or substantially all employers withdraw from the plan pursuant to an agreement in a relatively short period of time. Were ABF Freight to completely withdraw from certain multiemployer pension plans, whether in connection with a mass withdrawal or otherwise, under current law, it would have material liabilities for its share of the unfunded vested liabilities of each such plan.

 

The 25 multiemployer pension plans to which ABF Freight contributes vary greatly in size and in funded status. ABF Freight’s contribution obligations to these plans are specified in the ABF NMFA, which was implemented on November 3, 2013 and extends through March 31, 2018. The funding obligations to the multiemployer pension plans are intended to satisfy the requirements imposed by the Pension Protection Act of 2006 (the “PPA”), which was permanently extended by the Reform Act under the CFCAA. Through the term of its current collective bargaining agreement, ABF Freight’s contribution obligations generally will be satisfied by making the specified contributions when due. However, we cannot determine with any certainty the contributions that will be required under future collective bargaining agreements for our contractual employees.

 

Several of the multiemployer pension plans to which ABF Freight contributes are underfunded and, in some cases, significantly underfunded. The underfunded status of these plans developed over many years, and we believe that an improved funded status will also take time to be achieved. In addition, the highly competitive industry in which we operate could impact the viability of contributing employers. The reduction or loss of contributions by member employers, the impact of market risk on plan assets and liabilities, and the effect of any one or combination of the aforementioned business risks, which are outside our control, have the potential to adversely affect the funded status of the multiemployer pension plans, potential withdrawal liabilities, and our future contribution requirements.

 

Based on the most recent annual funding notices we have received, most of which are for plan years ended December 31, 2014, approximately 64% of ABF Freight’s contributions to multiemployer pension plans are made to plans that are in “critical status” (generally less than 65% funded), including the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”), and approximately 3% of our contributions are made to plans that are in “endangered status” (generally more than 65% but less than 80% funded), as defined by the PPA.

 

Approximately one-half of ABF Freight’s multiemployer pension contributions are made to the Central States Pension Plan. The funded percentage of the Central States Pension Plan, as set forth in information provided by the Central States Pension Plan, was 47.9%, 48.4%, and 47.6% as of January 1, 2015, 2014, and 2013, respectively. In 2005, the Internal Revenue Service (the “IRS”) granted an extension of the period of time over which the Central States Pension Plan amortizes unfunded liabilities by ten years, subject to the condition that a targeted funding ratio is maintained by the plan. Based on information currently available to us, the Central States Pension Plan has not received notice of revocation of the ten-year amortization extension granted by the IRS. In the unlikely event that the IRS were to revoke the extension, the revocation would apply retroactively to the 2004 plan year, which would result in a material liability for ABF Freight’s share of the resulting funded deficiency, the extent of which is currently unknown to us.

 

We operate in a highly competitive industry, and our business could suffer if we are unable to adequately address downward pricing pressures and other factors that could adversely affect our profitability and ability to compete in the transportation industry.

 

We face significant competition in local, regional, national, and, to a lesser extent, international markets. ABF Freight competes with many other LTL carriers of varying sizes, including both union and nonunion LTL carriers and, to a lesser extent, with truckload carriers and railroads. Our Panther and ABF Logistics businesses compete with domestic and global logistics service providers which compete in one or more segments of the transportation industry. Numerous factors could adversely impact our ability to compete effectively in the transportation and logistics industry, retain our existing

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customers, or attract new customers, which could have a material adverse effect on our business, financial condition, and results of operations. These competitive factors include, but are not limited to, the following: 

·

Some of our competitors have greater capital resources, a lower cost structure, greater market share, or a broader coverage network than we do or have other competitive advantages.

·

Our nonunion competitors generally have a lower fringe benefit cost structure for their freight-handling and driving personnel than union carriers, and our nonunion competitors may have greater operating flexibility. Wage and benefit concessions granted to certain union competitors allow for a lower cost structure than ours and may impact our competitiveness in the LTL industry.

·

Some of our competitors, such as railroads, are outside the motor carrier freight transportation industry, and certain challenges specific to the motor carrier freight transportation industry, including the competitive freight rate environment; capacity restraints in times of growing freight volumes; increased costs and potential shortages of commercial truck drivers; changes to driver hours-of-service requirements; increased costs of fuel and other operating expenses; and costs of compliance with existing and potential legal and environmental regulations, could result in the service offerings of these competitors being more competitive.

·

Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which limits our ability to maintain or increase prices. If customers select transportation service providers based on price alone rather than the total value offered, we may be unable to maintain our operating margins or to maintain or grow tonnage levels.

·

Customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors.

·

Customers may reduce the number of carriers they use by selecting “core carriers” as approved transportation service providers, and in some instances, we may not be selected.

·

Certain of our competitors may offer a broader portfolio of services or more effectively bundle their service offerings, which could impair our ability to maintain or grow our share of one or more markets in which we compete.

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Competition in the LTL industry from asset-light logistics and freight brokerage companies may adversely affect customer relationships and prices in our ABF Freight operations. Conversely, our ABF Logistics and Panther businesses may be adversely impacted if customers develop their own logistics operations, thus reducing demand for our services, or if shippers shift business to truckload brokerage companies or asset-based trucking companies that also offer brokerage services in order to secure access to those companies’ trucking capacity, particularly in times of tight industry-wide capacity.

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The trend toward consolidation in the transportation industry could continue to create larger LTL carriers with greater financial resources and other competitive advantages relating to their size. ABF Freight could experience some competitive difficulties if the remaining LTL carriers, in fact, realize advantages because of their size. Industry consolidations could also result in our competitors providing a more comprehensive set of services at competitive prices, which could adversely affect our results of operations.

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Based on economic conditions and industry trends, customers may transition traditional LTL business to truckload shipments. Under certain economic conditions, shipment sizes can increase, prompting shippers to utilize truckload carriers rather than LTL carriers, which could adversely affect our results of operations. In addition, our results of operations could be negatively impacted if our long-haul LTL business is reduced by the trend toward truckload consolidation, whereby a customer gathers groups of shipments, which were traditionally transported by long-haul LTL, into full loads which are tendered to a truckload carrier that will transport them to a distant distribution point where they are then transferred to various carriers as short-haul LTL shipments to the ultimate consignees.

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Advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the costs of these investments.

 

Our business operations are subject to numerous governmental regulations, and costs of compliance with, or liability for violations of, existing or future regulations could have a material adverse effect on our results of operations.

 

Various federal and state agencies exercise broad regulatory powers over the transportation industry, generally governing such activities as operations of and authorization to engage in motor carrier freight transportation, operations of non-vessel-operating common carriers, operations of ocean freight forwarders and ocean transportation intermediaries, safety, contract compliance, insurance and bonding requirements, tariff and trade policies, customs, import and export, employment practices, licensing and registration, taxation, environmental matters, data privacy and security, and financial reporting. We could become subject to new or more restrictive regulations, such as regulations relating to engine emissions,

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drivers’ hours of service, occupational safety and health, ergonomics, or cargo security. Increases in costs to comply with such regulations or the failure to comply, which could subject us to penalties or revocation of our permits or licenses, could increase our operating expenses or otherwise have a material adverse effect on the results of our operations. Such regulations could also influence the demand for transportation services.

 

Our failures, or the failures of our contracted owner operators and third-party carriers, to comply with DOT safety regulations or downgrades in our safety rating could have a material adverse impact on our operations or financial condition. A downgrade in our safety rating could cause us to lose the ability to self-insure. The loss of our ability to self-insure for any significant period of time could materially increase insurance costs or we could experience difficulty in obtaining adequate levels of insurance coverage.

 

The FMCSA’s final rule on ELDs became effective in February 2016 and carriers are required to be in compliance with the mandate by December 2017. We have incurred significant costs to equip our fleet with ELDs and we will continue to incur costs to comply with the ELD mandate, which will increase our operating expenses.

 

Further, many states have initiated enforcement programs to evaluate the classification of independent contractors, and class actions and other lawsuits have arisen in our industry seeking to reclassify independent contractor drivers as employees for a variety of purposes, including workers’ compensation, wage-and-hour, and health care coverage. There can be no assurance that legislative, judicial, or regulatory authorities will not introduce proposals or assert interpretations of existing rules and regulations resulting in the reclassification of the owner operators of our Panther segment as employees. In the event of such reclassification of our owner operators, we could be exposed to various liabilities and additional costs and our business and results of operations could be adversely affected. These liabilities and additional costs could include exposure, for both future and prior periods, under federal, state, and local tax laws, and workers’ compensation, unemployment benefits, labor, and employment laws, as well as potential liability for penalties and interest, which could have a material adverse effect on the results of operations and financial condition of our Panther segment.

 

Our asset-light logistics segments utilize third-party service providers who are subject to similar regulation requirements as previously mentioned. If the operations of these providers are impacted to the extent that a shortage of quality third-party service providers occurs, there could be a material adverse effect on the operating results and business growth of our asset-light logistics segments. Also, activities by these providers that violate applicable laws or regulations could result in government or third party actions against us. Although third-party service providers with whom we contract agree to abide by our policies and procedures, we may not be aware of, and may therefore be unable to remedy, violations by them.

 

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. The costs of compliance with existing and future environmental laws and regulations may be significant and could adversely impact our results of operations.

 

We are subject to various environmental laws and regulations dealing with the handling of hazardous materials and similar matters. We may transport or arrange for the transportation of hazardous materials and explosives, and we operate in industrial areas where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination could occur. At certain ABF Freight facilities, we store fuel in underground and aboveground tanks and/or we operate with non-discharge certifications or stormwater permits under the federal Clean Water Act. We may be subject to substantial fines or civil penalties if we fail to obtain proper certifications or permits or if we do not comply with required testing provisions. Our operations involve the risks of, among others, fuel spillage or leakage, environmental damage, and hazardous waste disposal. Under certain environmental laws, we could be subject to strict liability for any costs relating to contamination at our past or present facilities and at third-party waste disposal sites, as well as costs associated with the cleanup of accidents involving our vehicles. Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, violations of applicable laws or regulations may subject us to cleanup costs and liabilities not covered by insurance or in excess of our applicable insurance coverage, including substantial fines, civil penalties, or civil and criminal liability, as well as bans on making future shipments in particular geographic areas, any of which could adversely affect our business and operating results. In addition, if any damage or injury occurs as a result of our transportation of hazardous materials or explosives, we may be subject to claims from third parties and bear liability for such damage or injury.

 

Concern over climate change, including the impact of global warming, has led to significant and increasing legislative and regulatory efforts to limit carbon and other greenhouse gas emissions, and some form(s) of federal, state, or regional climate change legislation is possible in the future. We are unable to determine with any certainty the effects of any future

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climate change legislation. However, emission-related regulatory actions have historically resulted in increased costs of revenue equipment, diesel fuel, and equipment maintenance, and future legislation, if enacted, could impose substantial costs on us that may adversely impact our results of operations. Such regulatory actions have also required vendors to introduce new engines, and the maintenance demands and reliability of vehicles equipped with these newly designed engines, as well as the residual values realized from the disposition of these vehicles, is uncertain. Such regulatory actions may also require changes in our operating practices and impair equipment productivity. We are also subject to increasing customer sensitivity to sustainability issues, and we may be subject to additional requirements related to customer-led initiatives or their efforts to comply with environmental programs. Until the timing, scope, and extent of any future regulation or customer requirements become known, we cannot predict their effect on our cost structure or our operating results. Furthermore, although we are committed to mandatory and voluntary sustainability practices, increased awareness and any adverse publicity about greenhouse gas emissions emitted by companies in the transportation industry could harm our reputation or reduce customer demand for our services.

 

We may be unsuccessful in realizing all or any part of the anticipated benefits of any recent or future acquisitions.

 

As part of our long-term strategy to ensure we are positioned to serve our customers within the changing marketplace by providing a comprehensive suite of transportation and logistics services, we have strategically invested in our asset-light logistics businesses with the acquisitions of Smart Lines Transportation Group, LLC and Bear Transportation Services, L.P. during 2015. We continue to evaluate acquisition candidates and may acquire assets and businesses that we believe complement our existing assets and business or enhance our service offerings. The processes of evaluating acquisitions and performing due diligence procedures include risks which may adversely impact the success of our selection of candidates, pricing of the transaction, and ability to integrate critical functional areas of the acquired business. Further, we may not be able to acquire any additional companies at all or on terms favorable to us. Certain of our larger, better capitalized competitors may seek to acquire some of the companies we may be interested in, and competition for acquisitions would likely increase acquisition prices and result in us having fewer acquisition opportunities.

 

Acquisitions may require substantial capital or the incurrence of substantial indebtedness or may involve the dilutive issuance of equity securities. If we consummate any future acquisitions, our capitalization and results of operations may change significantly. We may be unable to generate sufficient revenue from the operation of an acquired business to offset our acquisition or investment costs. The degree of success of our acquisitions will depend, in part, on our ability to realize anticipated cost savings and growth opportunities. Our success in realizing these benefits and the timing of this realization depends, in part, upon the successful integration of any acquired businesses. The possible difficulties of integration include, among others: retention of customers, key employees, and third-party service providers; unanticipated issues in the assimilation and consolidation of information, communications, and other systems; consolidation of corporate and administrative infrastructures; difficulties managing businesses that are outside our historical core competency; inefficiencies and difficulties that arise because of unfamiliarity with potentially new markets or geographic areas and new assets and the businesses associated with them; the effect on internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002; and unanticipated issues, expenses, and liabilities. The risks involved in successful integration could be heightened if we complete a large acquisition or multiple acquisitions within a short period of time. The diversion of management’s attention from our current operations to the acquired operations and any difficulties encountered in combining operations, including underestimation of the resources required to support the acquisitions, could prevent us from realizing the full benefits anticipated from the acquisitions and could adversely impact our results of operations and financial condition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business for which we have no recourse under applicable indemnification provisions. If acquired operations fail to generate sufficient cash flows, we may incur impairments of goodwill, intangibles, and other assets in the future.

 

We depend on our employees to support our business operations and future growth opportunities. If our relationship with our employees deteriorates; if we have difficulty attracting and retaining employees and/or independent owner operators for Panther’s operations; or if ABF Freight is unable to reach agreement on future collective bargaining agreements, we could be faced with labor inefficiencies, disruptions, or stoppages, or delayed growth, which could have a material adverse effect on our business, reduce our operating results, and place us at a further disadvantage relative to nonunion competitors.

 

As of December 2015, approximately 77% of ABF Freight’s employees were covered under the ABF NMFA, the collective bargaining agreement with the IBT which extends through March 31, 2018. The terms of future collective bargaining agreements or the inability to agree on acceptable terms for the next contract period may result in a work

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stoppage, the loss of customers, or other events that could have a material adverse effect on our competitive position, results of operations, cash flows, and financial condition. We could also experience a loss of customers or a reduction in our potential share of business in the markets we serve if shippers limit their use of unionized freight transportation service providers because of the risk of work stoppages.

 

ABF Freight operates in a highly competitive industry which consists predominantly of nonunion motor carriers. ABF Freight’s nonunion competitors have a lower fringe benefit cost structure and less stringent labor work rules, and certain carriers also have lower wage rates for their freight-handling and driving personnel. Wage and benefit concessions granted to certain union competitors also allow for a lower cost structure than that of ABF Freight. Under its current collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry, which continues to adversely impact our operating results relative to our competitors. We have not historically experienced any significant long-term difficulty in attracting or retaining qualified drivers and freight-handling personnel for ABF Freight, although short-term difficulties have been encountered in certain situations, such as periods of significant increases in tonnage levels, and the available pool of drivers has been declining. Difficulty in attracting and retaining qualified drivers and freight-handling personnel or increases in compensation or fringe benefit costs could affect our profitability and our ability to grow. Government regulations or the adverse impact of certain legislative actions which result in shortages of qualified drivers could also impact our ability to grow the company. If we are unable to continue to attract and retain qualified drivers, we could incur higher driver recruiting expenses or a loss of business. In addition to difficulties we may experience in driver retention, if we are unable to effectively manage our relationship with the IBT, we could be less effective in ongoing relations and future negotiations, which could lead to operational inefficiencies and increased operating costs.

 

The driver fleet of our Panther segment is made up of independent owner operators and individuals. We face intense competition in attracting and retaining qualified owner operators from the available pool of drivers and fleets, and we may be required to increase owner operator compensation or take other measures to remain an attractive option for owner operators, which may negatively impact our results of operations. If we are not able to maintain our delivery schedules due to a shortage of drivers or if we are required to increase our rates to offset increases in labor costs, our services may be less competitive which could have an adverse effect on our business.

 

Our ability to maintain and grow our business will also depend, in part, on our ability to retain and attract additional sales representatives and other key operational personnel and properly incentivize them to obtain new customers, maintain existing customer relationships, and efficiently manage our business. If we are unable to maintain or expand our sales and operational workforce, our ability to increase our revenues and operate our business could be negatively impacted.

 

Our business is cyclical in nature, and we are subject to general economic factors and instability in financial and credit markets that are largely beyond our control, any of which could adversely affect our business, financial condition, and results of operations.

 

Our business is cyclical in nature and tends to reflect general economic conditions. Our performance is affected by recessionary economic cycles, downturns in customers’ business cycles, and changes in their business practices. Our tonnage and shipment levels are directly affected by industrial production and manufacturing, distribution, residential and commercial construction, and consumer spending, in each case, primarily in the North American economy, as well as our customers’ inventory levels and capacity in the trucking industry. Recessionary economic conditions may result in a general decline in demand for freight transportation and logistics services. The pricing environment generally becomes more competitive during periods of slow economic growth and economic recessions, which adversely affects the profit margin for our services. Economic conditions could adversely affect our customers’ business levels, the amount of transportation services they require, and their ability to pay for our services, thus negatively impacting our working capital and our ability to satisfy our financial obligations and covenants of our financing arrangements. Because a portion of our costs are fixed, it may be difficult for us to quickly adjust our structure proportionately with fluctuations in volume levels. Customers encountering adverse economic conditions represent a greater potential for uncollectible accounts receivable, and, as a result, we may be required to increase our allowances for uncollectible accounts receivable. For our asset-light logistics businesses, our obligation to pay third-party service providers is not contingent upon payment from our customers, and we extend credit to certain of these customers which increases our exposure to uncollectible receivables.

 

We depend on suppliers for equipment, parts, and services that are critical to our operations. A disruption in the availability or a significant increase in the cost to obtain these supplies, resulting from the effect of adverse economic conditions or

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related financial constraints on our suppliers’ business levels or otherwise, could adversely impact our business and results of operations.

 

We are affected by the instability in the financial and credit markets that from time to time has created volatility in various interest rates and returns on invested assets in recent years. We are subject to market risk due to variable interest rates on our accounts receivable securitization program and the revolving credit facility (“Credit Facility”) outstanding under our Amended and Restated Credit Agreement. Although we have an interest rate swap agreement to mitigate a portion of our interest rate risk by effectively converting $50.0 million of borrowings under our Credit Facility, of which $70.0 million remains outstanding at the end of February 2016, from variable-rate interest to fixed-rate interest, changes in interest rates may increase our financing costs related to our Credit Facility, future borrowings against our accounts receivable securitization program, new capital lease or note payable arrangements, or additional sources of financing. Furthermore, future financial market disruptions may adversely affect our ability to refinance our Credit Facility and accounts receivable securitization program, maintain our letter of credit arrangements or, if needed, secure alternative sources of financing. If any of the financial institutions that have extended credit commitments to us are adversely affected by economic conditions, disruption to the capital and credit markets, or increased regulation, they may become unable to fund borrowings under their credit commitments or otherwise fulfill their obligations to us, which could have an adverse impact on our ability to borrow additional funds, and thus have an adverse effect on our operations and financial condition. (See Note G to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of our financing arrangements.)

 

Our qualified nonunion defined benefit pension plan trust holds investments in equity and debt securities. Declines in the value of plan assets resulting from instability in the financial markets, general economic downturn, or other economic factors beyond our control could further diminish the funded status of the nonunion defined benefit pension plan and potentially increase our requirement to make contributions to the plan. A change in the interest rates used to calculate our funding requirements under the PPA may impact contributions required to fund our plan. Significant plan contribution requirements could reduce the cash available for working capital and other business needs and opportunities. An increase in required pension plan contributions may adversely impact our financial condition and liquidity. Substantial future investment losses on pension plan assets would increase pension expense in the years following the losses. In addition, a change in the discount rate used to calculate our obligations for our nonunion defined benefit pension plan and postretirement health benefit plan for financial statement purposes would impact the accumulated benefit obligation and expense for these plans. An increase in expense for these pension and postretirement plans may adversely impact our results of operations. We could also experience losses on investments related to our cash surrender value of variable life insurance policies, which may negatively impact our results of operations.

 

Furthermore, it is not possible to predict the effects of actual or threatened armed conflicts, terrorist attacks, or political and/or civil unrest on the economy or on consumer confidence in the United States or the impact, if any, on our future results of operations or financial condition.

 

Our total assets include goodwill and intangibles. If we determine that these items have become impaired in the future, our earnings could be adversely affected.

 

As of December 31, 2015, we had recorded goodwill of $96.5 million and intangible assets, net of accumulated amortization, of $76.8 million. Our goodwill and intangible assets resulted from acquisitions in the asset-light logistics segments, including the acquisition of Panther on June 15, 2012. Panther and ABF Logistics are each evaluated as a separate reporting unit for the impairment assessment of goodwill and intangible assets. Our annual impairment evaluations of goodwill and indefinite-lived intangible assets in 2015, 2014, and 2013 produced no indication of impairment of the recorded balances. However, significant declines in business levels or other changes in cash flow assumptions or other factors that negatively impact the fair value of the operations of Panther or ABF Logistics could result in impairment and a resulting non-cash write-off of a significant portion of our goodwill and intangible assets, which would have an adverse effect on our financial condition and operating results.

 

We depend on services provided by third parties, and increased costs or disruption of these services, and claims arising from these services, could adversely affect our results of operations, cash flows, and customer relationships.

 

A reduction in the availability of rail services or services provided by third-party capacity providers to meet customer requirements, as well as higher utilization of third-party agents to maintain service levels in periods of tonnage growth, could increase purchased transportation costs which we may be unable to pass along to our customers. If a disruption or

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reduction in transportation services from our rail or other third-party service providers were to occur, we could be faced with business interruptions that could cause us to fail to meet the needs of our customers. In addition, we may not be able to negotiate competitive contracts with railroads to expand our capacity, add additional routes, obtain multiple providers, or obtain railroad services at costs which are acceptable to us or our customers, any of which could limit our ability to provide this service. If these situations occur, our results of operations, cash flows, and customer relationships could be adversely impacted.

 

Our ability to secure the services of such third-party service providers is affected by many risks beyond our control. The inability to obtain the services of reliable third parties at competitive prices; the shortage of quality third-party providers, including owner operators for Panther and drivers of contracted truckload carriers for the brokerage operations of ABF Logistics; shortages in available cargo capacity; equipment shortages in the transportation industry, particularly among contracted truckload carriers; changes in regulations impacting transportation; labor disputes; or a significant interruption in service or stoppage in third-party transportation services could have a material adverse effect on the operating results of our asset-light logistics businesses.

 

Third-party providers can be expected to increase their prices based on market conditions or to cover increases in operating expenses. These providers are subject to industry regulations which may have a significant impact on their operations, causing them to increase prices or exit the industry. Increased industry demand for these transportation services may reduce available capacity and such a reduction or other changes in these services offered by third parties may increase pricing or otherwise change the services we are able to offer to our customers. If we are unable to correspondingly increase the prices we charge to our customers, or if we are unable to secure sufficient third-party services to meet our commitments to our customers, there could be a material adverse impact on the operations, revenues, and profitability of our asset-light logistics businesses and our customer relationships.

 

In addition, we may be subject to claims arising from services provided by third parties, particularly in connection with our Panther and ABF Logistics operations, which are dependent on third-party contract carriers. From time to time, the drivers who are employees, owner operators, or independent contractors working for third-party carriers that we contract with are involved in accidents that may result in cargo loss or damage, other property damage, or serious personal injuries. As a result, claims may be asserted against us for actions by such drivers or for our actions in retaining them. We may also incur claims in connection with third-party vendors utilized in FleetNet’s operations. Our third-party contract carriers and other vendors may not agree to bear responsibility for such claims or we may become responsible if they are unable to pay the claims, for example, due to bankruptcy proceedings, and such claims may exceed the amount of our insurance coverage or may not be covered by insurance at all.

 

We are subject to litigation risks that could result in significant expenditures and have other material adverse effects on our business, results of operations, and financial condition.

 

The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, competitive matters, personal injury, property damage, cargo claims, safety and contract compliance, environmental liability, and other matters. We are subject to risk and uncertainties related to liabilities which may result from the cost of defending against class-action litigation, such as alleged violations of anti-trust laws, wage-and-hour, and discrimination claims, and any other legal proceedings. Some or all of our expenditures to defend, settle, or litigate these matters may not be covered by insurance or could impact our cost and ability to obtain insurance in the future. Also, litigation can be disruptive to normal business operations and could require a substantial amount of time and effort by our management team.  Any material litigation or a catastrophic accident or series of accidents could have a material adverse effect on our business, results of operations, and financial condition. Our business reputation and our relationship with our customers, suppliers, and employees may also be adversely impacted by our involvement in legal proceedings. For more information related to the Company’s legal proceedings, see Note O to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

We establish reserves based on our assessment of legal matters and contingencies. Subsequent developments related to legal claims asserted against us may affect our assessment and estimates of our recorded legal reserves and may require

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us to make payments in excess of our reserves, which could have an adverse effect on our financial condition or results of operations.

 

Claims expenses or the cost of maintaining our insurance could have a material adverse effect on our results of operations and financial condition.

 

Claims may be asserted against us for accidents or for cargo loss or damage, property damage, personal injury, and workers’ compensation occurring in our operations. Claims may also be asserted against us for accidents involving the operations of third-party service providers that we utilize for our asset-light logistics segments, for our actions in retaining their services, or for loss or damage to our customers’ goods for which we are determined to be responsible. Such claims against us may not be covered by insurance policies or may exceed the amount of insurance coverage, which could adversely impact our results of operations and financial condition. We have established liabilities which are adjusted to reflect our claims experience; however, actual claims costs and legal expenses may exceed our estimates. If the frequency and/or severity of claims increase, our operating results could be adversely affected. The timing of the incurrence of these costs could significantly and adversely impact our operating results. We are self-insured for workers’ compensation, third-party casualty loss, and cargo loss or damage claims for the operations of ABF Freight and certain of our other subsidiaries. We also self-insure for medical benefits for our eligible nonunion personnel. Because we self-insure for a significant portion of our claims exposure and related expenses, our insurance and claims expense may be volatile. If we lose our ability to self-insure for any significant period of time, insurance costs could materially increase and we could experience difficulty in obtaining adequate levels of insurance coverage in that event. ABF Freight’s self-insurance program for third-party casualty claims is conducted under a federal program administered by a government agency. If the government were to terminate the program or if ABF Freight were to be excluded from the program, our insurance costs could increase. Additionally, if our third-party insurance carriers or underwriters leave the trucking sector, it could materially increase our insurance costs or collateral requirements, or create difficulties in finding insurance in excess of our self-insured retention limits. We could also experience additional increases in our insurance premiums or deductibles in the future due to market conditions or if our claims experience worsens. If our insurance or claims expense increases, or if we decide to increase our insurance coverage in the future, and we are unable to offset any increase in expense with higher revenues, our earnings could be adversely affected. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our results of operations and financial condition.

 

Significant increases in health care costs related to medical inflation, claims experience, current and future federal and state laws and regulations, and other cost components that are beyond our control could significantly increase the costs of our self-insured medical plans and postretirement medical costs, or require us to adjust the level of benefits offered to our employees. In particular, with the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “PPACA”), we are required to provide health care benefits to all full-time employees that meet certain minimum requirements of coverage and affordability, or otherwise be subject to a payment per employee based on the affordability criteria set forth in the PPACA. Many of these requirements have been phased in over time, with the majority of the most impactful provisions affecting us having begun in the second quarter of 2015. The PPACA also requires individuals to obtain coverage or face individual penalties, so employees who are currently eligible but have elected not to participate in our health care plans may ultimately find it more advantageous to do so. In general, implementing the requirements of health care reform is likely to impose additional administrative costs. The costs of maintaining and monitoring compliance and reports and other effects of these new healthcare requirements, including any failure to comply, may significantly increase our health care coverage costs and could materially adversely affect our financial condition and results of operations.

 

We have programs in place with multiple surety companies for the issuance of unsecured surety bonds in support of our self-insurance program for workers’ compensation and third-party casualty. Estimates made by the states and the surety companies of our future exposure for our self-insurance liabilities could influence the amount and cost of additional letters of credit and surety bonds required to support our self-insurance program, and we may be required to maintain secured surety bonds in the future which could increase the amount of our cash equivalents and short-term investments restricted for use and unavailable for operational or capital requirements.

 

We depend heavily on the availability of fuel for our trucks. Fuel shortages, changes in fuel prices, and the inability to collect fuel surcharges could have a material adverse effect on our results of operations.

 

The transportation industry is dependent upon the availability of adequate fuel supplies. A disruption in our fuel supply resulting from natural or man-made disasters, armed conflicts, terrorist attacks, actions by producers, or other political,

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economic, and market factors that are beyond our control could have a material adverse effect on our operations. We maintain fuel storage and pumping facilities at our distribution centers and certain other terminals; however, we may experience shortages in the availability of fuel at certain locations and may be forced to incur additional expense to ensure adequate supply on a timely basis to prevent a disruption to our service schedules.

 

Fuel represents a significant operating expense for us, and we do not have any long-term fuel purchase contracts or any hedging arrangements to protect against fuel price increases. Fuel prices fluctuate greatly due to factors beyond our control, such as political events, price and supply decisions by oil producing countries and cartels, terrorist activities, and hurricanes and other natural or man-made disasters, and fuel prices have fluctuated significantly in recent years. Significant increases in fuel prices or fuel taxes resulting from these or other economic or regulatory changes which are not offset by base freight rate increases or fuel surcharges could have an adverse impact on our results of operations.

 

Our ABF Freight and Panther segments charge a fuel surcharge based on an index of national diesel fuel prices. Although revenues from fuel surcharges generally more than offset increases in direct diesel fuel costs, we incur certain fuel costs that cannot be recovered with fuel surcharges, and other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. We cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on our overall rate structure or the total price that we will receive from our customers. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. Throughout 2015, the fuel surcharge mechanism generally continued to have market acceptance among our customers; however, certain nonstandard pricing arrangements have limited the amount of fuel surcharge recovered. The negative impact on operating margins of capped fuel surcharge revenue during periods of increasing fuel costs is more evident when fuel prices remain above the maximum levels recovered through the fuel surcharge mechanism on certain accounts. Also, because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture in any particular period the increased costs we pay for fuel, especially in periods in which fuel prices rapidly increase. In periods of declining fuel prices, which we have experienced since third quarter 2014, our fuel surcharge percentages also decrease, which negatively impacts our revenues, and the revenue decline may be disproportionate to our fuel costs. While the fuel surcharge is one of several components in our overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer. When fuel surcharges constitute a higher proportion of the total freight rate paid, our customers are less receptive to increases in base freight rates. Prolonged periods of inadequate base rate improvements could adversely impact operating results as elements of costs, including contractual wage rates, continue to increase. Further, during periods of low freight volumes, shippers can use their negotiating leverage to impose less compensatory fuel surcharge policies.

 

Higher fuel prices cause customers of our FleetNet segment to seek cost savings throughout their businesses which may result in a reduction of miles driven and/or a deferral of maintenance practices that may reduce the volume of our maintenance service events, resulting in an adverse impact on the segment’s operating results, financial condition and cash flows.

 

Increased prices for, or decreases in the availability of, new revenue equipment and decreases in the value of used revenue equipment, as well as higher costs of equipment-related operating expenses, could adversely affect our results of operations and cash flows.

 

In recent years, manufacturers have raised the prices of new revenue equipment significantly due to increased costs of materials and, in part, to offset their costs of compliance with new tractor engine and emissions system design requirements intended to reduce emissions, which have been mandated by the EPA, the NHTSA, and various state agencies such as those described in “Environmental and Other Government Regulations” of the Freight Transportation (ABF Freight) Segment section of “Business” in Item 1 of this Annual Report on Form 10-K. Greenhouse gas emissions regulations are likely to continue to impact the design and cost of equipment utilized in our operations. A number of states have mandated, and California and certain other states may continue to individually mandate, additional emission-control requirements for equipment which could increase equipment costs for entire fleets that operate in interstate commerce. If new equipment prices increase more than anticipated, we could incur higher depreciation and rental expenses than anticipated. Our third-party capacity providers, including Panther’s owner operators, are also subject to increased regulations and higher equipment prices which will, in turn, increase our costs for utilizing their services or may cause certain providers to exit the industry which could lead to a capacity shortage and further increase our costs of securing third-party services. If we

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are unable to fully offset any such increases in expenses with freight rate increases and/or improved fuel economy, our results of operations could be adversely affected. 

 

Reduced fuel demand due to improved fuel economy may result in legislative efforts to increase fuel taxes which, if enacted, could significantly increase our costs. If we are not able to adequately increase our freight rates, recover fuel surcharges, or recognize fuel economy savings to offset increases in equipment and maintenance costs, and if we are not able to offset fuel tax increases through reductions in other excise taxes or through increases in the rates we charge our customers, our business, results of operations, and financial condition could be adversely affected.

 

We may face difficulty in purchasing new equipment due to decreased supply. From time to time, some original equipment manufacturers (“OEMs”) of tractors and trailers may reduce their manufacturing output due to, for example, lower demand for their products in economic downturns or a shortage of component parts. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement components as economic conditions change. At times, market forces may create market situations in which demand outstrips supply. In those situations, we may face reduced supply levels and/or increased acquisition costs. An inability to continue to obtain an adequate supply of new tractors or trailers for our ABF Freight operations could have a material adverse effect on our business, results of operations, and financial condition.

 

During prolonged periods of decreased tonnage levels, we and other trucking companies may make strategic fleet reductions, which could result in an increase in the supply of used equipment. When the supply exceeds the demand for used revenue equipment, the general market value of used revenue equipment decreases. Used equipment prices are also subject to substantial fluctuations based on availability of financing and commodity prices for scrap metal. If market prices for used revenue equipment decline, corresponding decreases in our established salvage values on equipment being used in our ABF Freight operations would increase our depreciation expense, and we could incur impairment losses on assets held for sale which could have an adverse effect on our results of operations and cash flows.

 

Our management team is an important part of our business and loss of key employees could impair our business, financial condition, and results of operations.

 

We benefit from the leadership and experience of our senior management team and other key employees and depend on their continued services to successfully implement our business strategy. The unexpected loss of key employees or inability to execute our succession planning strategies could have an adverse effect on our operations and profitability if we are unable to secure replacement personnel that have sufficient experience in our industry and in the management of our business.

 

If we are unable to maintain our corporate reputation and the ABF, Panther, U-Pack and other brands and related intellectual property, our business may suffer.  The costs and resources expended to enforce or protect our trademarks or other intellectual property could adversely impact our results of operations.

 

ABF Freight is recognized as an industry leader for its commitment to quality, customer service, safety, and technology. Our business depends, in part, on our ability to maintain the image of the ABF brand as it applies to both ABF Freight and ABF Logistics. The Panther brand is also synonymous with premium service. Service, performance, and safety issues, whether actual or perceived and whether as a result of our actions or those of our third-party contract carriers and their drivers and owner operators, could adversely impact our customers’ image of the ABF companies, Panther, and UPack and result in the loss of business or impede our growth initiatives. Adverse publicity regarding labor relations, legal matters, environmental concerns, and similar matters, which are connected to ABF Freight, whether or not justified, could have a negative impact on our reputation and may result in the loss of customers and our inability to secure new customer relationships, as well as hinder the growth of our asset-light logistics businesses. Our business and our image could also be negatively impacted by a breach of our corporate policies by employees or vendors. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our business, results of operations, and financial condition, as well as require additional resources to rebuild our reputation and restore the value of our brand.

 

We have registered “ArcBest Corporation,” “ABF,” “FleetNet America,” “Panther,” and “U-Pack” and various related marks or designs, such as “The Skill & The Will” and “U-Pack We Drive. You Save.” as trademarks in the United States and, for some marks, we have registered or are pursuing registration in certain other countries. At times, competitors may adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to market

25


 

confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered trademarks. From time to time, we have acquired or attempted to acquire Internet domain names held by others when such names have caused consumer confusion or had the potential to cause consumer confusion. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

 

Our initiatives to grow our business operations or to manage our cost structure to business levels may take longer than anticipated or may not be successful.

 

Developing service offerings requires ongoing investment in personnel and infrastructure, including operating and management information systems. Depending upon the timing and level of revenues generated from our growth initiatives, the related results of operations and cash flows we anticipate from these initiatives and additional service offerings may not be achieved. If we are unable to manage our growth effectively, our business, results of operations, and financial condition may be adversely affected.

 

Our growth plans place significant demands on our management and operating personnel and we may not be able to hire, train, and retain the appropriate personnel to manage and grow these services. In addition, as we focus on growing our asset-light logistics businesses, we may encounter difficulties in adapting our corporate structure or in developing and maintaining effective partnerships among our operating segments which could hinder our operational, financial, and strategic objectives. Furthermore, we may invest significant resources to enter or expand our services in markets with established competitors, and we may not be able to successfully gain market share which could have an adverse effect on our operating results and financial condition.

 

We also face challenges and risks in implementing initiatives to manage our cost structure to business levels. We periodically evaluate and modify the ABF Freight network to reflect changes in customer demands and to reconcile ABF Freight’s infrastructure with tonnage levels and the proximity of customer freight, and there can be no assurance that these network changes, to the extent such network changes are made, will result in a material improvement of ABF Freight’s results of operations.

 

Our Credit Facility and accounts receivable securitization program contain customary financial and other customary restrictive covenants that may limit our future operations. A default under these financing arrangements or changes in regulations which impact the availability of funds or our costs to borrow under our financing arrangements could cause a material adverse effect on our liquidity, financial condition, and results of operations.

 

The Amended and Restated Credit Agreement, which governs our Credit Facility, contains representations and warranties, conditions, and events of default that are customary for financings of this type including, but not limited to, a minimum interest coverage ratio, a maximum adjusted leverage ratio, and limitations on incurrence of debt, investments, liens on assets, certain sale and leaseback transactions, transactions with affiliates, mergers, consolidations, and sales of assets. Our accounts receivable securitization program also contains affirmative and negative covenants, and events of default that are customary for financings of this type, including a maximum adjusted leverage ratio and requirements to maintain certain characteristics of the receivables, such as rates of delinquency, default, and dilution.

 

If we default under the terms of our Amended and Restated Credit Agreement or our accounts receivable securitization program and fail to obtain appropriate amendments to or waivers under the applicable financing arrangement, our borrowings under such facilities could be immediately declared due and payable. In the event of a default under either of these facilities, we could automatically default on the other of these facilities and on our outstanding notes payable and other financing agreements, unless the lenders to these facilities choose not to exercise remedies or to otherwise allow us to cure the default. If we fail to pay the amount due under our Credit Facility or accounts payable securitization program, the lenders could proceed against the collateral by which our Credit Facility is secured, our borrowing capacity may be limited, or the facilities could be terminated. If acceleration of outstanding borrowings occurs or if the facilities are terminated, we may have difficulty borrowing additional funds sufficient to refinance the accelerated debt or entering into new credit or debt arrangements, and, if available, the terms of the financing may not be acceptable. A default under our Amended and Restated Credit Agreement or accounts receivable securitization program or changes in regulations which

26


 

impact the availability of funds or our costs to borrow under our financing arrangements could have a material adverse effect on our liquidity and financial condition.

 

In addition, failing to achieve certain financial ratios as required by our Credit Facility and accounts receivable securitization program could adversely affect our ability to finance our operations, make strategic acquisitions or investments, or plan for or react to market conditions or otherwise execute our business strategies.

 

We have significant ongoing capital requirements that could have a material adverse effect on our business, profitability, and growth if we are unable to generate sufficient cash from operations or obtain sufficient financing on favorable terms or properly forecast capital needs to correspond with business volumes.

 

We have significant ongoing capital requirements. If we are not able to generate sufficient cash from operations in the future, our growth could be limited; it may be necessary for us to utilize our existing financing arrangements to a greater extent or enter into additional leasing or financing arrangements, possibly on less favorable terms; or our revenue equipment may have to be held for longer periods, which would result in increased expenditures for maintenance. Forecasting business volumes involves many factors, including general economic trends and the impact of competition, which are subject to uncertainty and beyond our control. If we do not accurately forecast our future capital investment needs, especially for revenue equipment, in relation to corresponding business levels, we could have excess capacity or insufficient capacity. In addition, our Credit Facility contains provisions that could limit our level of annual capital expenditures. If we were unable to properly forecast capital needs and/or were unable to generate sufficient cash from operations, obtain adequate financing at acceptable terms, or if our capital spending was otherwise limited, there could be an adverse effect on our business, profitability, and growth.

 

Our results of operations could be impacted by seasonal fluctuations or adverse weather conditions.

 

Our operations are impacted by seasonal fluctuations which affect tonnage and shipment levels and, consequently, revenues and operating results. Freight shipments and operating costs of the ABF Freight and ABF Logistics operating segments can be adversely affected by inclement weather conditions. The first quarter of each year generally has the lowest tonnage levels; at the same time, operating expenses may increase due to, among other things, a decline in fuel economy because of higher fuel density in colder temperatures, and higher accident frequency, increased claims, and potentially higher equipment repair expenditures caused by harsh weather. Expedited shipments of the Panther segment may decline due to post-holiday slowdowns during winter months and plant shutdowns during summer months. Emergency roadside service events of the FleetNet segment are influenced by seasonal variations, and service event volume is generally lower during mild weather conditions. Business levels of the ABF Moving segment are generally lower in the non-summer months when demand for moving services is typically lower. In addition to the impact of weather on seasonal business trends, severe weather events and natural disasters, such as harsh winter weather, floods, hurricanes, earthquakes, tornadoes, or lightning strikes, could disrupt our operations or the operations of our customers or disrupt fuel supplies or increase fuel costs, each of which could adversely affect our business levels and operating results. Climate change may have an influence on the severity of weather conditions, which could adversely affect our freight shipments and level of services provided by our asset-light logistics segments and, consequently, our operating results.

 

We are subject to certain risks arising from our international business.

 

We provide transportation and logistics services to and from international locations and are, therefore, subject to risks of international business, including, but not limited to, changes in the economic strength of certain foreign countries; social, political, and economic instability; the ability to secure space on third-party aircraft, ocean vessels, and other modes of transportation; burdens of complying with a wide variety of international and United States regulations and export and import laws as well as different liability standards and less developed legal systems; difficulties in enforcing contractual obligations and intellectual property rights; changes in foreign exchange rates; and restrictive trade policies and imposition of duties, taxes, or government royalties imposed by foreign governments, and changes in international tax laws and regulations. In addition, natural disasters, pandemics, acts of terrorism, and insurrections could impede our ability to provide satisfactory services to customers in international locations.

 

We are also subject to compliance with the Foreign Corrupt Practices Act (“FCPA”) and hold Customs-Trade Partnership Against Terrorism (“C-TPAT’) status for businesses within our ABF Freight, Panther, and ABF Logistics segments. Failure to comply with the FCPA and local regulations in the conduct of our international business operations may result in criminal and civil penalties against us. If we are unable to maintain our C-TPAT status, we may face a loss of certain

27


 

business due to customer requirements to deal only with C-TPAT participating carriers, because of the enhanced levels of supply chain security provided by participating in the C-TPAT program. In addition, loss of C-TPAT status for Panther may result in significant border delays for the segment, which could cause its international operations to be less efficient than competitors also operating internationally.

 

Our business could be harmed by antiterrorism measures.

 

As a result of actual or threatened terrorist attacks on the United States, federal, state, and municipal authorities have implemented and may implement in the future various security measures, including checkpoints and travel restrictions on large trucks. Although many companies would be adversely affected by any slowdown in the availability of freight transportation, the negative impact could affect our business disproportionately. For example, we offer specialized services that guarantee on-time delivery. If security measures disrupt the timing of deliveries, we could fail to meet the needs of our customers or could incur increased costs in order to do so. Additional security measures may also reduce productivity of our drivers and third-party transportation service providers, which would increase our operating costs. There can be no assurance that new antiterrorism measures will not be implemented and that such new measures will not have a material adverse effect on our business, results of operations, or financial condition.

 

 

28


 

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.PROPERTIES

 

The Company believes that its facilities are suitable and adequate and that they have sufficient capacity to meet current business requirements; although recent and expected business growth has required the Company to obtain additional office space.

 

The Company owns its corporate headquarters office building in Fort Smith, Arkansas, which contains 196,800 square feet. To support growth of its operating subsidiaries, on May 30, 2014, the Company announced its plans to construct a new corporate headquarters facility in Fort Smith, Arkansas. Construction of the new corporate headquarters facility commenced in April 2015 with an anticipated completion date in Spring 2017. Certain of the Company’s subsidiaries will continue to operate from the existing corporate headquarters office building after the new corporate headquarters facility is constructed.

 

Freight Transportation (ABF Freight) Segment

 

As of December 31, 2015, ABF Freight operated out of 248 terminal facilities, 10 of which also serve as distribution centers. The Company owns 115 of these facilities and leases the remainder from nonaffiliates. ABF Freight’s distribution centers are as follows:

 

 

 

 

 

 

 

 

    

No. of Doors

    

Square Footage

 

Owned:

 

 

 

 

 

Dayton, Ohio

 

330

 

250,700

 

Carlisle, Pennsylvania

 

333

 

196,200

 

Winston-Salem, North Carolina

 

150

 

174,600

 

Kansas City, Missouri

 

252

 

166,200

 

Atlanta, Georgia

 

226

 

158,200

 

South Chicago, Illinois

 

274

 

152,800

 

North Little Rock, Arkansas

 

196

 

150,500

 

Dallas, Texas

 

196

 

144,200

 

Albuquerque, New Mexico

 

85

 

71,000

 

 

 

 

 

 

 

Leased from nonaffiliate:

 

 

 

 

 

Salt Lake City, Utah

 

89

 

53,900

 

 

Asset-Light Logistics Segments

 

In January 2015, Panther purchased a new general office building and service bay in Medina, Ohio totaling 59,600 square feet to replace the office buildings it previously leased in Seville, Ohio. Additionally, Panther leases 10 other locations with approximately 33,100 square feet of office and warehouse space.

 

ABF Logistics and certain sales and administrative functions of ABF Moving lease three office buildings in Fort Smith, Arkansas with approximately 62,400 square feet of space. ABF Logistics operates in three additional leased offices located in Texas, Oklahoma, and Arkansas with a total of approximately 58,600 square feet.

 

FleetNet owns its offices located in Cherryville, North Carolina containing approximately 38,900 square feet and leases 7,700 square feet of secondary office space in Charlotte, North Carolina.

 

ABF Moving also owns certain general offices and warehouse buildings containing approximately 71,000 square feet and leases additional office space of approximately 15,400 square feet located in Wichita Falls, Texas. ABF Moving also leases an additional office space with approximately 16,000 square feet located in Nebraska.

 

29


 

ITEM 3.LEGAL PROCEEDINGS

 

Various legal actions, the majority of which arise in the normal course of business, are pending. These legal actions are not expected to have a material adverse effect, individually or in the aggregate, on our financial condition, results of operations, or cash flows. We maintain liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. We have accruals for certain legal, environmental, and self-insurance exposures. For information related to our environmental and legal matters, see Note O to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

30


 

PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information, Dividends and Holders

 

The common stock of ArcBest Corporation (the “Company”) trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ARCB.” The following table sets forth the high and low recorded sale prices of the common stock during the periods indicated as reported by NASDAQ and the cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

    

High

    

Low

    

Dividend

 

2014

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

37.61

 

$

29.88

 

$

0.03

 

Second quarter

 

 

45.68

 

 

35.09

 

 

0.03

 

Third quarter

 

 

45.19

 

 

31.50

 

 

0.03

 

Fourth quarter

 

 

47.52

 

 

30.14

 

 

0.06

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

46.75

 

$

36.95

 

$

0.06

 

Second quarter

 

 

39.78

 

 

31.21

 

 

0.06

 

Third quarter

 

 

34.97

 

 

24.80

 

 

0.06

 

Fourth quarter

 

 

28.80

 

 

19.97

 

 

0.08

 

 

As of February 22, 2016, there were 25,784,589 shares of the Company’s common stock outstanding, which were held by 263 stockholders of record.

 

On January 27, 2016, the Board of Directors declared a quarterly dividend of $0.08 per share to stockholders of record on February 10, 2016. The Company expects to continue to pay quarterly dividends in the foreseeable future, although there can be no assurance in this regard since future dividends will be at the discretion of the Board of Directors and will depend upon the Company’s future earnings, capital requirements, and financial condition, contractual restrictions applying to the payment of dividends under the Company’s Amended and Restated Credit Agreement (see Note G to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K), and other factors.

 

31


 

Issuer Purchases of Equity Securities

 

The Company has a program to repurchase its common stock in the open market or in privately negotiated transactions. The program has no expiration date but may be terminated at any time at the Board of Directors’ discretion.  Repurchases may be made either from the Company’s cash reserves or from other available sources. As of December 31, 2015 and 2014, treasury shares totaled 2,080,187 and 1,677,932, respectively. Under the repurchase program, the Company purchased 292,186 shares during the nine months ended September 30, 2015, and purchased 110,069 shares during the three months ended December 31, 2015 as summarized in the following table, leaving $47.2 million available for repurchase under the program. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum

 

 

 

 

 

 

 

 

Shares Purchased

 

Approximate Dollar

 

 

 

Total Number

 

Average

 

as Part of Publicly

 

Value of Shares that

 

 

 

of Shares

 

Price Paid

 

Announced

 

May Yet Be Purchased

 

 

    

Purchased

    

Per Share(1)

    

Program

    

Under the Program(2)

 

 

 

(in thousands, except share and per share data)

 

10/1/15 – 10/31/15 

 

 

$

 

 

$

50,000

 

11/1/15 – 11/30/15 

 

110,069

 

 

25.08

 

110,069

 

$

47,239

 

12/1/15 – 12/31/15 

 

 

 

 

 

$

47,239

 

    Total

 

110,069

 

$

25.08

 

110,069

 

 

 

 


(1)

Represents the weighted average price paid per common share including commission.

(2)

In January 2003, the Company’s Board of Directors authorized a $25.0 million common stock repurchase program. The Board of Directors authorized an additional $50.0 million in July 2005. In October 2015, the Board of Directors extended the share repurchase program, making a total of $50.0 million available for purchases.

 

As of February 22, 2016, the Company had purchased an additional 104,002 shares of its common stock for an aggregate cost of $2.0 million, leaving $45.2 million available for repurchase under the current buyback program.

 

 

32


 

ITEM 6.SELECTED FINANCIAL DATA

 

The following table includes selected financial and operating data for the Company as of and for each of the five years in the period ended December 31, 2015. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” in Part II of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

2015

    

2014

    

2013

    

2012(1)

    

2011

 

 

 

(in thousands, except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,666,905

 

$

2,612,693

 

$

2,299,549

 

$

2,065,999

 

$

1,907,609

 

Operating income (loss)

 

 

75,496

 

 

69,239

 

 

19,070

 

 

(14,568)

 

 

9,759

 

Income (loss) before income taxes

 

 

72,734

 

 

70,612

 

 

19,461

 

 

(16,992)

 

 

9,493

 

Income tax provision (benefit)

 

 

27,880

 

 

24,435

 

 

3,650

 

 

(9,260)

 

 

3,160

 

Net income (loss) attributable to ArcBest Corporation

 

 

44,854

 

 

46,177

 

 

15,811

 

 

(7,732)

 

 

6,159

 

Earnings (loss) per common share, diluted

 

 

1.67

 

 

1.69

 

 

0.59

 

 

(0.31)

 

 

0.23

 

Cash dividends declared per common share(2)

 

 

0.26

 

 

0.15

 

 

0.12

 

 

0.12

 

 

0.12

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

1,262,909

 

 

1,127,622

 

 

1,017,326

 

 

1,034,462

 

 

916,220

 

Current portion of long-term debt

 

 

44,910

 

 

25,256

 

 

31,513

 

 

43,044

 

 

24,262

 

Long-term debt (including notes payable and capital leases, excluding current portion)

 

 

167,599

 

 

102,474

 

 

81,332

 

 

112,941

 

 

46,750

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net capital expenditures, including assets acquired through notes payable and capital leases(3)

 

 

152,378

 

 

85,880

 

 

24,211

 

 

68,854

 

 

76,575

 

Depreciation and amortization of fixed assets

 

 

89,040

 

 

81,870

 

 

84,215

 

 

85,493

 

 

73,742

 

Amortization of intangibles

 

 

4,002

 

 

4,352

 

 

4,174

 

 

2,261

 

 

 

 


(1)

On June 15, 2012, the Company acquired Panther Expedited Services, Inc. Panther’s operations have been included in the consolidated results of operations since the acquisition date.

(2)

The Company’s Board of Directors increased the quarterly cash dividend to $0.06 per share in October 2014 and to $0.08 per share in October 2015.

(3)

Capital expenditures are shown net of proceeds from the sale of property, plant and equipment.

33


 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ArcBest Corporation® (the “Company,” “we,” “us,” and “our”) provides a comprehensive suite of freight transportation services and logistics solutions. Our principal operations are conducted through our Freight Transportation (ABF Freight®) segment, which consists of ABF Freight System, Inc. and certain other subsidiaries. Our other reportable operating segments are the following asset-light logistics (formerly referred to as “non-asset-based”) businesses: Premium Logistics (Panther); Emergency & Preventative Maintenance (FleetNet); Transportation Management (ABF Logistics®); and Household Goods Moving Services (ABF Moving®). (See additional segment descriptions in “Business” included in Part I, Item 1 and in Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.) References to the Company, including “we,” “us,” and “our,” in this Annual Report on Form 10-K are primarily to the Company and its subsidiaries on a consolidated basis.

 

ORGANIZATION OF INFORMATION

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided to assist readers in understanding our financial performance during the periods presented and significant trends which may impact our future performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. MD&A includes forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the statements made in this section due to a number of factors that are discussed in “Forward-Looking Statements” of Part I and “Risk Factors” of Part I, Item 1A of this Annual Report on Form 10-K. MD&A is comprised of the following:

 

·

Results of Operations includes:

·

an overview of consolidated results with 2015 compared to 2014 and 2014 compared to 2013, and a consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”) schedule;

·

a financial summary and analysis of the ABF Freight segment results of 2015 compared to 2014 and 2014 compared to 2013, including a discussion of key actions and events that impacted the results;

·

a financial summary and analysis of our asset-light logistics reportable operating segments, including a discussion of key actions and events that impacted the results; and

·

a discussion of other matters impacting operating results including seasonality, effects of inflation, economic conditions, environmental and legal matters, and information technology and cybersecurity.

 

·

Liquidity and Capital Resources provides an analysis of key elements of the cash flow statements, borrowing capacity and contractual cash obligations, including a discussion of financing arrangements and financial commitments.

 

·

Income Taxes provides an analysis of the effective tax rates and deferred tax balances, including deferred tax asset valuation allowances.

 

·

Critical Accounting Policies discusses those accounting policies that are important to understanding certain of the material judgments and assumptions incorporated in the reported financial results.

 

·

Recent Accounting Pronouncements discusses accounting standards that are not yet effective for our financial statements but are expected to have a material effect on our future results of operations or financial condition.

 

The key indicators necessary to understand our operating results include:

 

·

For the ABF Freight segment:

·

the overall customer demand for ABF Freight’s transportation services;

·

the volume of transportation services provided by ABF Freight, primarily measured by average daily shipment weight (“tonnage”), which influences operating leverage as tonnage levels vary;

·

the prices ABF Freight obtains for its services, primarily measured by yield (“revenue per hundredweight”), including fuel surcharges; and

34


 

·

ABF Freight’s ability to manage its cost structure, primarily in the area of salaries, wages, and benefits (“labor”), with the total cost structure measured by the percent of operating expenses to revenue levels (“operating ratio”).

 

·

For the asset-light logistics segments: 

·

primarily customer demand for logistics and premium transportation services combined with economic factors which influence the number of shipments or events used to measure changes in business levels; and

·

management of operating costs.

 

RESULTS OF OPERATIONS

 

Consolidated Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

 

2015

    

2014

    

2013

 

 

 

 

(in thousands, except per share data)

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

Freight Transportation (ABF Freight)

 

 

$

1,918,450

 

$

1,930,990

 

$

1,761,716

 

Premium Logistics (Panther)

 

 

 

300,368

 

 

316,668

 

 

246,849

 

Transportation Management (ABF Logistics)

 

 

 

203,529

 

 

152,632

 

 

105,223

 

Emergency & Preventative Maintenance (FleetNet)

 

 

 

174,952

 

 

158,581

 

 

137,546

 

Household Goods Moving Services (ABF Moving)

 

 

 

119,252

 

 

94,628

 

 

82,169

 

Other and eliminations

 

 

 

(49,646)

 

 

(40,806)

 

 

(33,954)

 

Total consolidated operating revenues

 

 

$

2,666,905

 

$

2,612,693

 

$

2,299,549

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

Freight Transportation (ABF Freight)

 

 

$

62,436

 

$

50,093

 

$

10,033

 

Premium Logistics (Panther)

 

 

 

10,798

 

 

15,640

 

 

6,956

 

Transportation Management (ABF Logistics)

 

 

 

5,861

 

 

3,835

 

 

2,973

 

Emergency & Preventative Maintenance (FleetNet)

 

 

 

2,954

 

 

3,122

 

 

3,274

 

Household Goods Moving Services (ABF Moving)

 

 

 

4,836

 

 

3,179

 

 

1,850

 

Other and eliminations

 

 

 

(11,389)

 

 

(6,630)

 

 

(6,016)

 

Total consolidated operating income

 

 

$

75,496

 

$

69,239

 

$

19,070

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

$

44,854

 

$

46,177

 

$

15,811

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

 

$

1.67

 

$

1.69

 

$

0.59

 

 

Consolidated operating income increased $6.3 million or 9.0% above 2014. However, net income and diluted earnings per share were lower in 2015 versus 2014 due to lower income from changes in cash surrender value of life insurance policies, which is reported below the operating income line on the consolidated statements of operations, and due to a higher tax rate in 2015 as further described within MD&A.

 

Our consolidated revenues, which totaled $2.7 billion for 2015, increased 2.1% compared to 2014, preceded by a 13.6% increase in 2014 revenues compared to 2013. The year-over-year increase in consolidated revenues for 2015 reflects a 10.5% increase in revenues of our asset-light logistics operating segments, on a combined basis, offset, in part, by a 0.6% decrease in revenues of ABF Freight (asset-based business). The year-over-year increase in consolidated revenues for 2014 reflects higher revenues for each segment due to increased business volumes. 

 

ABF Freight revenues represented 71%, 73%, and 75% of total revenues before other revenues and intercompany eliminations for 2015, 2014, and 2013, respectively. The 0.6% decrease in ABF Freight’s revenue in 2015 was due to lower fuel surcharges associated with decreased fuel prices in 2015, as compared to 2014, and a decline in tonnage levels, offset, in part, by a slight improvement in yield, as measured by billed revenue per hundredweight, including fuel surcharges. ABF Freight’s revenues increased 9.6% in 2014 compared to the prior year, primarily due to the impact of a 6.6% increase in tonnage and improved billed revenue per hundredweight which increased 2.9% in 2014 compared to 2013.

 

35


 

As a result of business acquisitions and growth due to strategic investments in personnel and infrastructure in recent years, our asset-light logistics segments have become a larger proportion of consolidated revenues, generating 29%, 27%, and 25% of total revenues before other revenues and intercompany eliminations for 2015, 2014, and 2013, respectively. The 10.5% year-over-year increase in revenues of our asset-light logistics segments, on a combined basis, for 2015 reflect higher business volumes due, in part, to more comprehensive customer services being offered across our consolidated enterprise and to the revenues resulting from acquisitions in the ABF Logistics segment of Smart Lines Transportation Group, LLC (“Smart Lines”) in January 2015 and Bear Transportation Services, L.P. (“Bear”) in December 2015.

 

Our improved consolidated operating income for 2015 benefited from improved cost management at ABF Freight through better utilization of owned equipment and driver resources, as well as more effective use of purchased transportation and rented equipment. The year-over-year changes in consolidated operating income, net income, and per share amounts for 2015 and 2014 primarily reflect the operating results of ABF Freight which are discussed in further detail within the ABF Freight sections of Results of Operations, as well as the items described below.

 

Consolidated operating results for 2015 were negatively impacted by an increase in nonunion healthcare costs which increased $6.1 million in 2015 over 2014, primarily due to an increase in severity of claims, and $0.9 million (pre-tax), or $0.6 million (after-tax) and $0.02 per share, of third-party casualty expense related to an unfavorable claim associated with a bankrupt FleetNet customer. These costs were partially offset by a net $2.2 million (pre-tax) decrease in other nonunion benefit costs, including lower pension settlement charges. 

 

Consolidated pension settlement charges relate primarily to our nonunion defined benefit pension plan. In 2015, we incurred pension settlement charges of $3.2 million (pre-tax), or $2.0 million (after-tax) and $0.07 per share, versus $6.6 million (pre-tax), or $4.0 million (after-tax) and $0.16 per share, in 2014, and $2.1 million (pre-tax), or $1.3 million (after-tax) and $0.05 per share, in 2013. We expect to continue to recognize pension settlement expense related to the nonunion defined benefit pension plan estimated to approximate $1.0 million (pre-tax) per quarter during 2016; however, the amount of quarterly pension settlement expense will fluctuate based on the amount of lump-sum benefit distributions paid to participants, actual returns on plan assets, and changes in the discount rate used to remeasure the accumulated benefit obligation of the plan upon settlement.

 

For 2015, the “Other and eliminations” line of operating income includes acquisition transaction costs of $1.4 million (pre-tax), or $0.9 million (after-tax) and $0.03 per share, and additional investments in enterprise solutions to provide an improved platform for revenue growth and for offering ArcBest services across multiple operating segments. Our enterprise solutions initiative involves developing and implementing integrated solutions for shippers with wide-ranging transportation needs and facilitating access to our services through a single point of contact. Quarterly costs in 2016 associated with this initiative and the related impact on the “Other and eliminations” costs are estimated to be approximately $1.0 million, on average, above the 2015 quarterly levels.

 

The comparisons of consolidated net income and earnings per share for 2015 versus 2014 were also impacted by the effective tax rates, as further described within the Income Taxes section of MD&A, and lower income from life insurance policies. A portion of our cash surrender value of variable life insurance policies have investments, through separate accounts, in equity and fixed income securities and, therefore, are subject to market volatility. Life insurance proceeds and changes in cash surrender value of life insurance policies contributed $0.01 to diluted earnings per share in 2015, compared to $0.1per share in 2014.

 

Because a portion of our unvested restricted stock units contain rights for the award holder to receive nonforfeitable dividends, they are considered “participating securities”; and, therefore, we are required to use the two-class method for determining earnings per share. Under this two-class method, a portion of net income and the amount of dividends paid on the participating securities are deducted from net earnings and allocated to the participating securities based on the proportion of weighted-average participating securities to the total of weighted-average common stock outstanding plus the weighted-average participating securities. The remainder of net earnings (or adjusted net earnings) is used for calculating earnings per share available to common stock. The amount of earnings allocated to participating securities (i.e., the amount of earnings deducted from total net earnings and not used in the calculation of earnings per share available to common stockholders) depends on the relationship of the number of participating securities to weighted-average common stock outstanding, and this allocated earnings amount also changes as net earnings changes. The effect of allocating earnings to participating securities reduced earnings per share available to common stockholders by $0.02 per share in 2015, compared to $0.09 per share in 2014, and $0.03 per share in 2013. (See the calculation of earnings per share in Note L to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.) The impact of

36


 

dividends to be paid on unvested restricted stock units in the two-class method for calculating earnings per share was lessened beginning in 2015 as a result of changes made to our restricted stock program in early 2015.

 

Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)

 

Consolidated Adjusted EBITDA increased 5.3% and 38.2% in 2015 and 2014, respectively, compared to the prior year. The year-over-year increases in consolidated Adjusted EBITDA reflect changes in consolidated earnings, which were driven primarily by ABF Freight’s operating results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

 

2015

    

2014

    

2013

 

 

 

 

($ thousands)

 

CONSOLIDATED ADJUSTED EBITDA

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

44,854

 

$

46,177

 

$

15,811

 

Interest and other related financing costs

 

 

 

4,400

 

 

3,190

 

 

4,183

 

Income tax provision

 

 

 

27,880

 

 

24,435

 

 

3,650

 

Depreciation and amortization

 

 

 

93,042

 

 

86,222

 

 

88,389

 

Amortization of share-based compensation

 

 

 

8,029

 

 

6,998

 

 

5,494

 

Amortization of net actuarial losses of benefit plans and pension settlement expense

 

 

 

7,432

 

 

9,300

 

 

10,046

 

 

 

 

$

185,637

 

$

176,322

 

$

127,573

 

 

Adjusted EBITDA is a primary component of the financial covenants contained in our Amended and Restated Credit Agreement (see Financing Arrangements within the Liquidity and Capital Resources section of MD&A). Management also uses Adjusted EBITDA as a key measure of our performance and for business planning. Adjusted EBITDA assists us in comparing our operating performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that, in management’s opinion, do not reflect our core operating performance. Management believes Adjusted EBITDA is useful because it provides analysts, investors, and others the same information that we use internally for purposes of assessing our core operating performance. However, this financial measure should not be construed as a better measurement than operating income, operating cash flow, net income, or earnings per share, as determined under generally accepted accounting principles (“GAAP”). Other companies may calculate Adjusted EBITDA differently; therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

ABF Freight Segment Overview

 

ABF Freight’s operations are affected by general economic conditions, as well as a number of other factors that are more fully described in “Business” in Item 1 and “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K. The key performance factors and operating results for ABF Freight are discussed in the following paragraphs.

 

ABF Freight represented approximately 71% of our 2015 total revenues before other revenues and intercompany eliminations. As of December 2015, approximately 77% of ABF Freight’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which extends through March 31, 2018. The ABF NMFA included a 7% wage rate reduction effective on the November 3, 2013 implementation date, followed by wage rate increases of 2% on July 1 in each of the next three years, which began in 2014, and a 2.5% increase on July 1, 2017; a one-week reduction in annual compensated vacation effective for employee anniversary dates on or after April 1, 2013; the option to expand the use of purchased transportation; and increased flexibility in labor work rules. The ABF NMFA and the related supplemental agreements provide for continued contributions to various multiemployer health, welfare, and pension plans maintained for the benefit of ABF Freight’s employees who are members of the IBT. The estimated net effect of the November 3, 2013 wage rate reduction and the benefit rate increase which was applied retroactively to August 1, 2013 was an initial reduction of approximately 4% to the combined total contractual wage and benefit rate under the ABF NMFA. Following the initial reduction, the combined contractual wage and benefit contribution rate under the ABF NMFA is estimated to increase approximately 2.5% to 3.0% on a compounded annual basis throughout the contract period which extends through March 31, 2018.

 

Tonnage

The level of tonnage managed by ABF Freight is directly affected by industrial production and manufacturing, distribution, residential and commercial construction, consumer spending, primarily in the North American economy, and capacity in

37


 

the trucking industry. ABF Freight’s operating results are affected by economic cycles, customers’ business cycles, and changes in customers’ business practices. ABF Freight actively competes for freight business based primarily on price, service, and availability of flexible shipping options to customers. ABF Freight seeks to offer value through identifying specific customer needs, then providing operational flexibility and seamless access to its services and those of our asset-light logistics operating segments in order to respond with customized solutions.

 

ABF Freight’s tonnage levels decreased 1.5% on a per-day basis in 2015 which was preceded by an increase of 6.6% and 3.6% on a per-day basis in 2014 and 2013, respectively, compared to the prior year. The tonnage decrease in 2015 compared to 2014 was primarily influenced by a general weakening in the macroeconomic environment and the related freight market conditions, which were impacted by higher customer inventory levels and lower industrial-related manufacturing production. The increases in year-over-year tonnage levels for the 2014 and 2013 periods resulted primarily from improved economic conditions and, for 2014, additional LTL shipments associated with service and demand constraints in other transportation modes.

 

Pricing

Another key factor to ABF Freight’s operating results is the industry pricing environment which influences ABF Freight’s ability to obtain appropriate margins and price increases on customer accounts. Externally, ABF Freight’s pricing is typically measured by billed revenue per hundredweight, which is a reasonable, although approximate, measure of price change. Generally, freight is rated by a class system, which is established by the National Motor Freight Traffic Association, Inc. Light, bulky freight typically has a higher class and is priced at a higher revenue per hundredweight than dense, heavy freight. Changes in the rated class and packaging of the freight, along with changes in other freight profile factors such as average shipment size, average length of haul, freight density, and customer and geographic mix, can affect the average billed revenue per hundredweight measure.

 

Approximately 35% of ABF Freight’s business is subject to ABF Freight’s base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other 65% of ABF Freight’s business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. The majority of the business that is subject to negotiated pricing arrangements is associated with larger customer accounts with annually negotiated pricing arrangements, and the remaining business is priced on an individual shipment basis considering each shipment’s unique profile, value provided by ABF Freight to the customer, and current market conditions. Since pricing is established individually by account, ABF Freight focuses on individual account profitability rather than a single measure of billed revenue per hundredweight when considering customer account or market evaluations. This is due to the difficulty of quantifying, with sufficient accuracy, the impact of changes in freight profile characteristics, which is necessary in estimating true price changes.

 

Fuel

The transportation industry is dependent upon the availability of adequate fuel supplies. ABF Freight charges a fuel surcharge which is based on the index of national on-highway average diesel fuel prices published weekly by the U.S. Department of Energy.  Although revenues from fuel surcharges generally more than offset increases in direct diesel fuel costs, other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. ABF Freight cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on ABF Freight’s overall rate structure or the total price that ABF Freight will receive from its customers. While the fuel surcharge is one of several components in ABF Freight’s overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer.

 

During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of these changes and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Fuel prices have fluctuated significantly in recent years. Whether fuel prices fluctuate or remain constant, ABF Freight’s operating results may be adversely affected if competitive pressures limit its ability to recover fuel surcharges. Throughout 2015, the fuel surcharge mechanism generally continued to have market acceptance among ABF Freight customers; however, certain nonstandard pricing arrangements have limited the amount of fuel surcharge recovered. The negative impact on operating margins of capped fuel surcharge revenue during periods of increasing fuel costs is more evident as fuel prices remain above the maximum levels recovered through the fuel surcharge mechanism on certain accounts.

 

38


 

In periods of declining fuel prices, which we have experienced since third quarter 2014, ABF Freight’s fuel surcharge percentages also decrease, which negatively impacts the total billed revenue per hundredweight measure and, consequently, revenues, and the revenue decline may be disproportionate to our fuel costs. To better align fuel surcharges to fuel- and energy-related expenses and provide more stability to account profitability as fuel prices change, ABF Freight may, from time to time, revise its standard fuel surcharge program which impacts 35% to 40% of ABF Freight’s shipments and primarily affects noncontractual customers. ABF Freight made such revisions to its fuel surcharge scale effective February 4, 2015,  to better align the fuel surcharge rate at lower fuel prices, and effective February 1, 2016, to establish surcharge rates for fuel prices at the lower end of the scale and to adjust the upper end of the fuel surcharge scale to better align with expected fuel costs. Despite the February 2015 revision to the fuel surcharge program and the transition of certain nonstandard pricing arrangements to base LTL freight rates in recent years, ABF Freight’s 2015 revenues, in comparison to 2014, were negatively impacted by lower fuel surcharge revenue due to a decline in the nominal fuel surcharge rate, while total fuel costs were also lower. ABF Freight’s operating results will continue to be impacted by further changes in fuel prices and the related fuel surcharges.

 

Labor Costs

Labor costs, including retirement and healthcare benefits for ABF Freight’s contractual employees that are provided by a number of multiemployer plans (see Note I to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K), are impacted by contractual obligations under ABF Freight’s collective bargaining agreement primarily with the IBT and other related supplemental agreements. ABF Freight’s total salaries, wages, and benefits, amounted to 61.2%, 58.1%, and 61.0% of ABF Freight’s revenues for 2015, 2014, and 2013, respectively. In addition to higher salaries, wages, and benefits expense, the year-over-year increase as a percentage of revenue for 2015 was influenced by the effect of lower fuel surcharges on ABF Freight’s revenues. The improvement in labor costs as a percentage of revenue for 2014 primarily reflects the savings related to the ABF NMFA. ABF Freight’s ability to effectively manage labor costs has a direct impact on its operating performance. Although ABF Freight is generally effective in managing its costs to business levels, portions of labor costs are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure throughout the ABF Freight system to corresponding tonnage levels has been challenging during 2014 and 2015 as ABF Freight strives to maintain customer service. Labor costs are discussed further in the ABF Freight Segment Results section of Results of Operations.

 

ABF Freight operates in a highly competitive industry which consists predominantly of nonunion motor carriers. ABF Freight’s nonunion competitors have a lower fringe benefit cost structure and less stringent labor work rules, and certain carriers also have lower wage rates for their freight-handling and driving personnel. Wage and benefit concessions granted to certain union competitors also allow for a lower cost structure than that of ABF Freight. ABF Freight has continued to address with the IBT the effect of ABF Freight’s wage and benefit cost structure on its operating results.

 

The combined effect of cost reductions under the ABF NMFA, lower cost increases throughout the contract period, and increased flexibility in labor work rules are important factors in bringing ABF Freight’s labor cost structure closer in line with that of its competitors; however, under its collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry. These rates include contributions to multiemployer plans, a portion of which are used to fund benefits for individuals who were never employed by ABF Freight. Information provided by a large multiemployer pension plan to which ABF Freight contributes indicates that approximately 50% of the plan’s benefit payments are made to retirees of companies that are no longer contributing employers. In consideration of the impact of high multiemployer pension contribution rates, certain funds have not increased ABF Freight’s pension contribution rate for the annual contribution periods which began August 1, 2015 and 2014.  Rate freezes for the annual contribution periods which began August 1, 2015 and 2014 impacted multiemployer pension plans to which ABF Freight made approximately 70% and 80% of its total multiemployer pension contributions for the year ended December 31, 2015 and 2014, respectively.  

 

The Multiemployer Pension Reform Act of 2014 (the “Reform Act”), which was included in the Consolidated and Further Continuing Appropriations Act of 2015 that was signed into law on December 16, 2014, included new provisions to address the funding of multiemployer pension plans in critical and declining status, including certain of those in which ABF Freight participates. Provisions of the Reform Act include, among others, providing qualifying plans the ability to self-correct funding issues, subject to various requirements and restrictions, including applying to the U.S. Department of the Treasury (the “Treasury”) for the reduction of certain accrued benefits. Any actions taken by multiemployer pension plan trustees under the Reform Act to improve funding will not reduce the contribution rates ABF Freight is obligated to pay under its current contract with the IBT, and we cannot determine with any certainty the contributions that will be required under future collective bargaining agreements for ABF Freight’s contractual employees. However, management

39


 

believes the Reform Act is a constructive step in addressing the complex funding issue facing multiemployer pension plans and their contributing employers. See Note I to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the provisions of the Reform Act.

 

In September 2015, the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”) filed an application with the Treasury seeking approval under the Reform Act for a pension rescue plan, which includes accrued benefit reductions for participants in an attempt to avoid the insolvency of the Central States Pension Plan that otherwise is projected by the plan to occur. The proposed benefit reductions in the pension rescue plan, which are subject to various requirements and restrictions, vary depending on participants’ age, retirement status, years of credited service, and whether the participants’ current or former employer that withdrew from the multiemployer pension plan either failed to pay their full employer withdrawal obligations or paid their full employer withdrawal liability but guaranteed protection of the participants’ benefits. If the Treasury approves the proposed pension rescue plan, participants in the Central States Pension Plan will have an opportunity to vote on whether the rescue plan should be implemented; however, by law, the Treasury can override a negative participant vote and order that the pension rescue plan be implemented or modified. If approved, the pension rescue plan could be implemented as early as July 2016 based on the application filing date. As previously disclosed, the implementation of the rescue plan sought by the Central States Pension Plan would not reduce the benefit rates ABF Freight is obligated to pay under the ABF NMFA which will remain in effect through March 31, 2018.

 

Some employer companies that participate in multiemployer plans, in which ABF Freight also participates, have received proposals from, and entered into transition agreements with, certain multiemployer plans to restructure future plan contributions to be more in-line with benefit levels. These transition agreements, which require mutual agreement of numerous elements between the multiemployer plan and the contributing employer, may also result in recognition of withdrawal liabilities. We monitor and evaluate any such proposals we receive, including the potential economic impact to our business. At the current time, there are no proposals provided to ABF Freight that are acceptable.

 

ABF Freight Segment Results — 2015 Compared to 2014

 

The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for ABF Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

 

2015

    

2014

 

ABF Freight Operating Expenses (Operating Ratio)

 

 

 

 

 

 

Salaries, wages, and benefits

 

 

61.2

%  

58.1

%  

Fuel, supplies, and expenses

 

 

16.0

 

18.7

 

Operating taxes and licenses

 

 

2.6

 

2.4

 

Insurance

 

 

1.5

 

1.3

 

Communications and utilities

 

 

0.8

 

0.8

 

Depreciation and amortization

 

 

3.9

 

3.6

 

Rents and purchased transportation

 

 

10.3

 

11.9

 

Gain on sale of property and equipment

 

 

(0.1)

 

(0.1)

 

Pension settlement expense

 

 

0.1

 

0.3

 

Other

 

 

0.4

 

0.4

 

 

 

 

96.7

%  

97.4

%  

 

 

 

 

 

 

 

ABF Freight Operating Income

 

 

3.3

%  

2.6

%  

 

40


 

The following table provides a comparison of key operating statistics for ABF Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2015

    

2014

    

% Change

 

Workdays

 

 

251.5

 

 

251.5

 

 

 

Billed revenue(1) per hundredweight, including fuel surcharges

 

$

28.96

 

$

28.74

 

0.8

%  

Pounds

 

 

6,619,146,561

 

 

6,717,820,225

 

(1.5)

%  

Pounds per day

 

 

26,318,674

 

 

26,711,015

 

(1.5)

%  

Shipments per day

 

 

20,272

 

 

19,803

 

2.4

%  

Shipments per DSY(2) hour

 

 

0.451

 

 

0.456

 

(1.1)

%

Pounds per DSY(2) hour

 

 

585.42

 

 

615.22

 

(4.8)

%

Pounds per shipment

 

 

1,298

 

 

1,349

 

(3.8)

%

Pounds per mile(3)

 

 

19.48

 

 

19.96

 

(2.4)

%

 


(1)

Revenue for undelivered freight is deferred for financial statement purposes in accordance with ABF Freight’s revenue recognition policy. Billed revenue used for calculating revenue per hundredweight measurements has not been adjusted for the portion of revenue deferred for financial statement purposes. Billed revenue has been adjusted to exclude intercompany revenue that is not related to freight transportation services.

(2)

Dock, street, and yard (“DSY”) measures are further discussed in ABF Freight Operating Expenses within this section of ABF Freight Segment Results. ABF Freight uses shipments per DSY hour to measure labor efficiency in ABF Freight’s local operations, although total pounds per DSY hour is also a relevant measure when the average shipment size is changing.

(3)

Total pounds per mile is used by ABF Freight to measure labor efficiency of its linehaul operations, although this metric is influenced by other factors including freight density, loading efficiency, average length of haul, and the degree to which purchased transportation, including rail service, is used.

 

ABF Freight Revenues

ABF Freight’s revenues for the year ended December 31, 2015 totaled $1,918.5 million, compared to $1,931.0 million in 2014. ABF Freight’s billed revenue (as described in footnote (1) to the key operating statistics table above) decreased 0.7% on a per-day basis in 2015 compared to 2014, primarily reflecting a 1.5% decrease in tonnage per day partially offset by an 0.8% increase in total billed revenue per hundredweight, including fuel surcharges. The increases in total billed revenue per hundredweight occurred despite lower fuel surcharge revenues associated with decreased fuel prices.

 

The decrease in tonnage per day in 2015 compared to 2014 reflects slight growth in LTL-rated tonnage, more than offset by a reduction in truckload-rated business. Freight market conditions, which have continued to be impacted by higher customer inventory levels and lower industrial-related manufacturing production, have contributed to ABF Freight’s tonnage decline. With the softer freight environment, spot truckload capacity has been more available in the market compared to 2014, which has provided alternative carriers for some of our customers’ large-sized shipments. As a result, ABF Freight’s average weight per shipment declined 3.8% for 2015, compared to the prior year, while shipment counts increased during 2015.

 

ABF Freight implemented nominal general rate increases on its LTL base rate tariffs of 4.95% effective October 5, 2015 and 5.4% effective November 3, 2014 and March 24, 2014, although the rate changes vary by lane and shipment characteristics. For 2015, prices on accounts subject to annually negotiated contracts which were renewed during the period increased 4.7% compared to the prior year.

 

The increase in total billed revenue per hundredweight for 2015, compared to 2014, reflects changes in profile and business mix, including a higher proportion of LTL-rated business, which generally has a higher revenue per hundredweight than truckload-rated business. The year-over-year increase in the billed revenue per hundredweight measure was influenced by the 2014 and 2015 general rate increases and improvements in contractual and deferred pricing, offset, in part, by lower fuel surcharge revenue in 2015, as further discussed in the Fuel section of the ABF Freight Segment Overview of Results of Operations. ABF Freight’s average nominal fuel surcharge rate for 2015 dropped approximately 675 basis points from 2014 levels. Excluding changes in fuel surcharges and freight profile, average pricing on ABF Freight’s traditional LTL-rated business experienced low- to mid-single digit percentage increases for 2015, compared to 2014.

 

ABF Freight Revenues – First Quarter to-date 2016

Quarter-to-date through late-February 2016, ABF Freight’s billed revenues were approximately 1% lower than the same prior-year period on a per-day basis due to a decrease in billed revenue per hundredweight of approximately 2.5%, which includes the effect of lower fuel surcharges, partially offset by a 1% to 1.5% increase in tonnage on a per-day basis. The

41


 

increase in quarter-to-date tonnage levels on a per-day basis for 2016 is favorably influenced by the effects of less severe winter weather events as compared to the same period of 2015.

 

Tonnage levels are seasonally lower during January and February while March provides a disproportionately higher amount of the first quarter’s business. The first quarter of each year generally has the highest operating ratio of the year, although other factors, including the state of the economy, may influence quarterly comparisons. The impact of general economic conditions and ABF Freight’s pricing approach, as further discussed in the Pricing section of the ABF Freight Segment Overview of Results of Operations, may continue to impact ABF Freight’s tonnage levels and, as such, there can be no assurance that ABF Freight will achieve improvements in its current operating results. There can also be no assurance that the current pricing trends will continue. The competitive environment could limit ABF Freight from securing adequate increases in base LTL freight rates and could limit the amount of fuel surcharge revenue recovered.

 

ABF Freight Operating Income

ABF Freight generated operating income of $62.4 million in 2015 compared to $50.1 million in 2014. ABF Freight’s 2015 operating ratio improved by 0.7 percentage points to 96.7% from 97.4% in 2014. ABF Freight’s ability to further improve its operating ratio is impacted by: managing its cost structure (as discussed in the Labor Costs section of the ABF Freight Overview of Results of Operations) in line with tonnage levels; and securing price increases to cover contractual wage and benefit rate increases, costs of maintaining customer service levels, and other inflationary increases in cost elements. ABF Freight’s operating ratio was impacted by changes in operating expenses as discussed in the following paragraphs.

 

ABF Freight Operating Expenses

Labor costs, which are reported in operating expenses of the ABF Freight segment as salaries, wages, and benefits, amounted to 61.2% and 58.1% of ABF Freight’s revenues for 2015 and 2014, respectively. Salaries, wages, and benefits costs increased 3.1% as a percentage of revenue in 2015 compared to 2014. The increase as a percentage of revenue was influenced by the effect on ABF Freight’s revenues of lower fuel surcharges associated with a decline in the nominal fuel surcharge rate due to decreased fuel prices. Management believes that productivity declines, as further described in the following paragraph, have contributed to excess labor costs relative to freight levels. The 2015 increase in labor costs also reflects increased utilization of ABF Freight road drivers versus the use of purchased transportation, for which expenses declined compared to the prior year. In addition, contractual wage and benefit rates were at higher levels as the ABF NMFA contractual wage rate increased 2.0% effective July 1, 2014 and again on July 1, 2015, and, including the effect of the multiemployer pension plan rate freezes previously discussed in the ABF Freight Segment Overview section of Results of Operations, the health, welfare, and pension benefit rate increased an average of approximately 3.3% and 3.7% effective primarily on August 1, 2014 and 2015, respectively.

 

Although ABF Freight manages costs with business levels, portions of salaries, wages, and benefits are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure throughout the ABF Freight system to corresponding tonnage levels are limited as ABF Freight strives to maintain customer service. ABF Freight believes that this service emphasis generates improved yields and business levels. Returning productivity to historical levels is an important priority for the management team at ABF Freight in order to reduce costs. Shipments per DSY hour, which decreased 1.1% for 2015 compared to 2014, reflect reduced efficiency in street operations as ABF Freight focused on improving customer service, partially offset by improvement in dock handling. Lower weight per shipment for 2015 also contributed to lower pounds per DSY hour and a decrease in pounds per mile compared to the prior year. The lower weight per shipment in 2015 reflects smaller average shipment sizes and a shift in business mix to a higher proportion of LTL-rated shipments than truckload-rated shipments.

 

Fuel, supplies, and expenses as a percentage of revenue decreased 2.7% in 2015 compared to 2014, primarily due to a decrease in ABF Freight’s average fuel price per gallon (excluding sales tax) of approximately 40%.

 

Depreciation and amortization as a percentage of revenue increased by 0.3% in 2015 compared to 2014 due primarily to the timing of replacing road tractors and higher per unit costs. The 2016 capital expenditure plan reflects continuation of the accelerated replacement of revenue equipment and alignment with our long-term strategy to advance operational efficiencies. We expect that new equipment added in 2015 and planned for 2016 will increase the dependability and consistency of service, improve fuel economy, and lower maintenance costs.

 

Rents and purchased transportation as a percentage of revenue decreased by 1.6% in 2015 compared to 2014. The decrease was primarily attributable to lower utilization of rail and other service providers and agents and lower fuel surcharges associated with purchased transportation services. Purchased transportation miles were down approximately 38% for 2015

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from 2014, due to increased utilization of ABF Freight road drivers. Rental expense for revenue equipment also decreased during 2015, compared to the prior year, reflecting improved equipment management and tractor and trailer purchases made during 2014 and 2015.

 

Pension settlement charges, primarily related to our nonunion defined benefit pension plan, totaled $2.4 million in 2015 versus $5.3 million in 2014.

 

ABF Freight Segment Results — 2014 Compared to 2013

 

The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for ABF Freight:

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

2014

    

2013

 

ABF Freight Operating Expenses (Operating Ratio)

 

 

 

 

 

Salaries, wages, and benefits

 

58.1

%  

61.0

%  

Fuel, supplies, and expenses

 

18.7

 

18.9

 

Operating taxes and licenses

 

2.4

 

2.5

 

Insurance

 

1.3

 

1.2

 

Communications and utilities

 

0.8

 

0.9

 

Depreciation and amortization

 

3.6

 

4.1

 

Rents and purchased transportation

 

11.9

 

10.3

 

Gain on sale of property and equipment

 

(0.1)

 

 —

 

Pension settlement expense

 

0.3

 

0.1

 

Other

 

0.4

 

0.4

 

 

 

97.4

%  

99.4

%  

 

 

 

 

 

 

ABF Freight Operating Income

 

2.6

%  

0.6

%

 

The following table provides a comparison of key operating statistics for ABF Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

2014

    

2013

    

% Change

 

Workdays

 

 

251.5

 

 

251.5

 

 

 

Billed revenue(1) per hundredweight, including fuel surcharges

 

$

28.74

 

$

27.94

 

2.9

%

Pounds

 

 

6,717,820,225

 

 

6,304,083,944

 

6.6

%

Pounds per day

 

 

26,711,015

 

 

25,065,940

 

6.6

%

Shipments per day

 

 

19,803

 

 

18,418

 

7.5

%

Shipments per DSY(2) hour

 

 

0.456

 

 

0.471

 

(3.2)

%

Pounds per DSY(2) hour

 

 

615.22

 

 

640.73

 

(4.0)

%

Pounds per shipment

 

 

1,349

 

 

1,361

 

(0.9)

%

Pounds per mile(3)

 

 

19.96